As a Shareholder of an Investment Bank, You Exist for the Bankers

I am not a fan of the investment bank model as a shareholder.  The collapse of Bear Stearns and Lehman, and the takeover of Merrill Lynch was not a surprise to me, though the timing and velocity of the collapse was unexpected.  This is not because I am particularly foresightful or intelligent.  Rather, I think that eventually, any business model that dramatically leverages marked-to-market securities and relies on funding through public markets is a disaster waiting to happen.  I have little doubt that had the government not stepped in to directly intervene in the capital markets, both Goldman and Morgan Stanley were goners.  And given that nothing has really changed in the structure of our financial markets, we will replay this financial crisis all over again in the not-too-distant future, with Goldman, Morgan and perhaps a few big hedge funds back at the public troughs pleading for a bailout.  And I am sure the government, run by the bankers for the bankers, will oblige.

(Remember when we used to think it was a government of the lawyers, by the lawyers, for the lawyers?  Well, say what you want about lawyers but at least they did not bring the world to the brink of collapse, unlike the bankers.)

This is one reason why I do not like to invest in investment banks.  Another reason is because the mind-set of the those who run the banks is to look after their own first.  You, as a shareholder, come second.  You as a shareholder exist to pay them.

Witness the response of the investment banks to the 50% bonus tax imposed on investment bankers by the British government. (HT to Worthwhile Canadian Initiative

City bankers will suffer little or no impact from the bonus supertax imposed by the government last month, according to a Financial Times poll of leading investment banks.

Most banks, polled in an anonymised survey, said they would absorb all or part of the cost of the one-off 50 per cent tax by inflating their bonus pools, even at the risk of irritating the government and their own shareholders.

The results chime with intelligence garnered by headhunters. “The tax is going to be 90 per cent absorbed by the banks,” said one senior recruitment consultant with clients in the City.

In many cases that will mean banks doubling bonus pools, with the cost of the tax borne by shareholders. Dividends, already under pressure as regulators force banks to retain earnings to boost capital, are likely to be hit, bankers concede.

As a shareholder, you come a distant second to the bankers' compensation.  Wall Street exists to make a handful of people enormously wealthy. And if that wealth is extracted from you the shareholder, so be it.

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