The King Is Dead, Long Live the King: On the Fall of Investment Banking (And Its Potential Rise)
- By Professor Prabhu Guptara
- Published 09/22/2008
Professor Prabhu Guptara
Professor Prabhu Guptara is Executive Director, Organisational Development, Wolfsberg (a subsidiary of UBS - one of the largest banks in the world). He is also Freeman of the City of London and of the Worshipful Company of Information Technologists, and Chartered Fellow of the of the Chartered Institute of Personnel and Development; he is also Fellow: of the Institute of Directors, of the Royal Commonwealth Society, and of the Royal Society for the Encouragement of the Arts Commerce and Manufactures; and he continues to supervise PhD research at the University of Fribourg (Switzerland) as well as to be Visiting Professor at various Universities and Business Schools around the world.
Earlier roles include: a Governor of the Polytechnic of Central London, Member of the Council of the British Institute of Management, of the International Federation of Training & Development Organisations (IFTDO), of the Association for Management Education and Development (UK), of the South East Regional Council of the Confederation of British Industry.
Judge, 1988 National Training Awards, 1980 Commonwealth Poetry Prize, 1990 & 1991 Deo Gloria Prize for Fiction; Chair of the Panel of Judges, Deo Gloria Prize 1992 & 1993.
Experience with an enormous range of organisations including: Akzo Nobel (Netherlands), the Associated Banks Institute (Germany), Barclays Bank (UK), British Petroleum (UK), the Council of Europe, Cultor (Finland), Deutsche Bank (Germany), Groupe Bull (France), Federation of Finnish Engineers (Finland), the International Management Association of Japan, Kemira (Finland), Kraft Jakob Suchard (Switzerland), Leadership Academy (Finland), Nokia Telecommunications (Finland), Novo Nordisk (Denmark), Sedgwick International Insurance and Reinsurance Brokers (UK), Singapore Institute of Management, Sonatrach (Algeria), Sun Alliance (UK), UNCTAD, Valeo (France), and so on.
Organiser, chair and lecturer by invitation for numerous international conferences, he has contributed widely to radio and television in the UK and other countries (The Money Program, Any Questions) and has written for Financial Times (London, UK), The Guardian, The Times and other publications; articles, for example, in The Gower Handbook of Management, The Gower Handbook of Quality, and the International Encyclopedia of Business & Management (Routledge).
A CD-ROM has been issued of his lecture at the Professorenforum, University of Zurich, titled "Making the World Better - Why it does NOT happen...and what TO DO about it"
Further information available from rbadertscher@coba.ch
His best-known research publication is "Top Executives in the Global 100 Companies and their IT-Competence" (ADVANCE: Management Training Ltd., UK, and Wolfsberg Executive Development Centre, Switzerland, 1998); and he is included in Debrett's People of Today and in Who's Who in the World. Professor Prabhu Guptara lives in Switzerland.
So Goldman Sachs (GS) and Morgan Stanley (MS), the last surviving global investment banks, have become regulated banks! That is to say, they are now subject toregulation by the Fed.
In addition to giving GS and MS the ability to take deposits from savers, thus reducing their reliance on funding in the short-term repo market, both GS and MS can now take advantage of loans from the Fed against the various kinds of collateral that are acceptable to the Fed.
It is worth recollecting that investment banking started as a separate industry following the consensus, after the Depression, that the "mixing" of insurance, mortgage, investment banking type activities with much more mundane banking activities, was at least one key cause of the Depression. The Glass-Steagall Act separated the two kinds of financial activities, till the Gramm-Leach-Biley Act stripped away towards the end of 1999 the regulations separating banking from investment companies, insurance companies and mortgage guarantee companies.
The Glass-Steagall Act's separation had been removed for only a few years before the current collapse, and many (including myself) would argue that the inter-relationship of investment, insurance, mortgage and banking industries that the Gramm-Leach-Biley Act allowed, was one key factor that led to the collapse.
If this analysis is correct, bringing GS and MS into the regulation of the Fed is only a partial solution.
Morever, there must always be room for creativity and innovation in the financial services industry as in every other industry.
I am not convinced that the current plans by the US government are adequate - though I hope and would like to think so! However, if and when, and for whatever combination of reasons, we recover from the current crisis, I have no doubt that innovative investment bank type activities outside the regulation of the Fed will reappear significantly. That would be altogether healthy.
However, one key regulation should be put in place now. Unregulated financial activity must never again be allowed to become many times the size of the regulated activity.
What should be the limit? We can argue about it. We need innovation but we also need system stability. Here is my offer, as an initial stab the limit: how about 25% of the regulated activity?
What should happen if unregulated activity starts exceeding such a limit? The top 10 firms involved in unregulated activity should be immediately made subject to regulation.
Innovation and creativity are important, and they have their place.