US investment banks no longer rule the cosmos. Autocratic leadership and weak boards, wispy capitalization and over-exuberant propriety trading have turned big bucks into a big bang. With the banking model a black hole and some masters of the universe looking for less elevated employment, the time has come for a more stable banking constellation.
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The search could start in Europe and Japan. Certainly, they have not been immune to the investment bank bacillus—witness the toxic debt-induced losses at UBS AG and, to a lesser degree, Nomura Holdings Inc. And not so long ago they wanted to be more like Wall Street than Bahnhofstrasse (a Zurich street where headquarters of UBS and Credit Suisse Group AG are located). But so far, no major European or Japanese investment bank has imploded like their US competitors.
There are three reasons for that. First, most leading European and Japanese investment banks are part of bigger groups—Deutsche Bank AG, BNP Paribas SA, Barclays Plc. and Mizuho Financial Group, Inc. They have retail deposits and lending businesses. Investment banking is nice when times are good, but not life-threatening when times are bad.
Second, partly because of their retail responsibilities, their leadership tends to be more cautious. Dick Fuld, chairman and chief executive of Lehman Brothers Holdings Inc., is only the latest in a long line of autocratic US investment bank barons to get into trouble. Those with longer memories will recall John Gutfreund, boss of the swallowed-up Salomon Brothers.
Third, the US-style investment banking springs from US culture. A penchant for risk-taking helped build the world’s biggest economy in the 20th century. But this cultural asset may have turned into a liability. Investment banking is necessary and will not disappear. But a different model is needed for the 21st century. Europe and Japan have no cause to crow, but Wall Street needs more humility.