Posted by: Dirk | July 10, 2008

(Book review) The Greed Merchants – How the Investment Banks Played the Free Market Game

Philip Augar is an insider. His account of the investment banks is an insightful read. He describes how the investment banks started making a lot of money in the 80s, and how they expanded their businesses into a global monopoly game. Augar claims that investment banks have the advantage of “the Edge”, since they have an advantage in information. To take advantage of that, banks had to put clients second and themselves first. Augar recalls the 90s, which culminated in the dot-com bubble. He reminds us of how IPOs took off, and how analysts provided almost always recommendations to buy. Corporate scandals followed, due to creative accounting. Enron, World Com, and the like showed that the system was rotten. New rules were thought up and put in place.

While this is not a scientific book, it is still interesting to see how investment banks work in the real world. Augar closes the book by stating that the regulation adopted to guarantee a less crisis-prone financial market are unsatisfying. In hindsight he was right, says the Economist:

This looks like just the beginning of the shake-up. “We lack appropriate constraints on risk-taking at investment banks,” says Barney Frank, the head of the House financial-services committee. Mr Frank wants Wall Street to be subjected to capital requirements similar to those for stodgier commercial banks (which are lobbying vociferously for the gap to be closed). But investment bankers argue that this would put them at an unfair disadvantage, since they have to mark their assets to market, whereas commercial banks can hold large chunks at historic cost.

Augar would certainly not be happy with this. He recommends a separation of broking and investment banking, which was put in place after the Great Depression and dismantled in the 90s (the Glass-Steagall act).

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