I'm with Jantra on this one. Investment Banks are profitable because people are willing to pay for their services - and they are willing to do so, presumably because they get value from those services. They might, for example, want to hedge price risk for a key input. Or swap a volatile flow of income for a more stable one of lower expected value. Firms want to merge and demerge and need advice. They are needed to market make in thin markets which would otherwise see much greater volatility. And even when undertaking 'proprietary trading' for their own account, they are creating value by closing up price mismatches and making use of arbitrage opportunities. The difference between their revenues and costs is value added in the same way as it is for retail banking, manufacturing, retail, etc etc. We were having arguments about this re: services, and before than re: industry (the idea then was that ultimately all value flows from the land and agricultural productivity).

But Investment Banking is different to retail banking in two respects. First, it is often more risky, at least in the short term (most of the long term losses from the financial crisis are not to do with investment banking but commercial loans, and to a lesser extent, residential loans). And secondly, it is not quite so fundamental to the operation of the monetary system. So there is a case for less protection to be offered to these kinds of operations than to retail banking which is a fundamental part of the most basic operations of a modern economy (payment systems, means-of-exchange, store-of-value etc).

This means the two types of banking should be treated and regulated differently. But it does not mean one is "good" and creates value, and one is "bad" and does not create value: the wages and profits generated are value added like other sectors of the economy.

This, to my simple brain, is the important bit...what's so wrong with it?

Because these banks caused the economic meltdown from which the UK has still not recovered. Some people got value or get value from their transactions but the majority suffered from those transactions, mis-valuations (fraudulent in many cases) and bundling of assets. There is ineffective regulation and it has been admitted that banks were involved in complicated trades that they basically did not understand.

If the last thirty years of financial disasters are not damning enough what should be worrying is how the banks have lost touch with local economies and how lending decisions are based on central dik-tat. Another reason for capital being difficult to obtain in peripheral areas.

Wow that's one jargon-filled paragraph. You manage to combine being didactic with trolling in a way that is boring, barely relevant, swivel-eyed and patronising. If you really think that your rants about tax and banking are adding anything new to most people's lives then God help you (cue rant from Jant about theology and atheism....)

Will everybody just CALM down! You people just make me want to... DRACARYS!

Wait a minute...?

Oh, shit. I forgot, that doesn't work in real life.

*Skulks off to read A Dance with Dragons.*

@swampy
I was trying to show how investment banks add value and provide services to those that require management of risk. If you don't understand it then perhaps you don't really know what investment banks do.

@jeremy
The financial crisis was mainly caused by bad mortgage lending which is retail banking and not investment banking. Investment banks remained, in the main, profitable during the financial crisis. Where investment banks were tied to retail banks, such as Barclays, this helped the retail division cope with the bad debt, write downs and loss of cash flow.

If you're looking to blame then look to society as a whole with its desire for fee free banking, its desire for credit to pay for things now rather than saving for tomorrow, the lack of regulation and a government who was willing to sit bank and think it had discovered the secret to endless growth fuelled by Ever increasing tax teceipts from the fs sector. The lenders also need to share some of the blame for changing tried and testing risk assessment criteria, but without customers need for credit, the lenders could not have lent.

Umm....nope. Crisis was caused by investment banks creating and investing in huge amounts of securitised mortgage debt, much of it so complex that it's still impossible to accurately value it today.

I can recommend a couple of good books for beginners on this subject if you'd like.

I'm not sure if this is a serious post or not? on one hand you're saying the problem was not caused by mortgages going bad, but then you say the problem was caused by mortgages going bad.

The retail banks lent to house buyers. The investment banks acquired the mortgae cash flows from the retail banks and packaged the various levels of mortage into CDOs. CDOs have been around for years although I do agree that as we move towards 2006 investment grade assets were being replaced with junk grade. This in effect meant the retail banks had the mortgage funds to lend out once more. The retail banks would reissue the mortgage funds and repackage and the investment banks would then create new instruments. The idea was that the investment banks would de facto hold the mortgages and the retail banks could match the cash inflows from the mortgage repayments with the cash outflows of the CDOs with the spread being the profit.

the issue arose when certain mortgage payments were being missed - it started our cincinnati and cleveland in ohio and quickly escalated. The issue was with defaults on mortgage payments - retail banking. The retail banks could not settle their CDOs exposing the investment banks to the risk that they had undertaken. The retail banks masked the true nature of the levels of risk associated with the difference tranches of debt being collateralised and as such the investment banks were over exposed. To suggest this was an investment bank issue is not fully understanding the problem.

consider Northern Rock who used to offer 50 year mortgages at 7 times annual salary or 125% LTV. It was that type of lending that made the spread very susceptible to the slightest changes in economic conditions. the retail banks would lend on generous initial terms on the back of rising house prices. In other words, borrowers could refinance in a couple of years due to the rising value of the house price. interest rates were low and charges were high. house prices stalled meaning borrowers could not refinance and were faced with interest rates that increased dramatically following the discount period.

God, here we go again. You are physically incapable of admitting you are wrong, even when you adopt a patently absurd position.

A relatively small amount of bad housing debt in the USA would not have brought down the entire western financial system if that debt had not been chopped up, securitised and sold around the world as AAA investment rated bonds. That's TRIPLE A, the same investment quality as US TREASURY BONDS!!!!

The Northern Rock "bad bank" mortgage book is still performing pretty well, by the way.

You can believe what you like in your own peculiar little Jantraworld, the rest of us know who brought down the financial system.

if you are looking to lay blame regarding the rating of investments you need to look towards S&P, Moodys and Fitch who assess the risk and grade accordingly.

the whole problem stemmed from CDOs (specifically MBSs). I've explained why mortgage holders entered default - they were given initial terms and were expected to refinance when those initial terms matured and the refinancing was done on the back of rising house prices. The house prices did not rise, the mortgage holders could not refinance and their payments increased beyond what they could afford. the cash inflows dried up and those with the junior and equity tranches suffered losses as a result of their investments becoming worthless. it was compounded when CDOs were created by holding equity in other CDOs. To say that this problem wasn't mortgage related is incorrect - it was entirely to do with defaulting mortgage payments and that was due to the mortgages offered by the retail banks

Rather than just say I am wrong, why not provide your explanation as to what happened and why?

Could this discussion be continued on a thread dedicated to this topic? I keep opening it thinking something has happened at Wood Street.

Well said!! If anyone wants to start a new topic then please feel free to do so with a new subject - new thread - 2, 3, 8 page post, whatever! but please don't change the direction of another thread that clearly was not put there to discuss other broader issues. Plenty looking in are just interested in Cardiff developments - Many thanks and have a nice day!!

The wages and profit generated is not like "other sectors of the economy" though. The other sectors of the economy are generally far more distributive, and tend to have a much much higher MPC, leading to widespread economic growth. The sorts of wages and profits you're talking about, are in levels high enough that they affect the entire economy in terms of MPC, even when not in recession, to the extent that any multiplier effect is negligible.

Apologies. I wrote that above reply before I read this suggestion.

telecoms, petrochems and pharma have a higher rate of return, have higher wages at the top and the profits are distributed far less equally than FS, yet you're not suggesting we have issues with those sectors.

Appreciated simon - not so Jantra

jantra makes me sad.

is he not sure another sulk and disappear for a few months, those were the days

An advocate of free speech huh!