Do investment banks add any social or economic value?

Goldman Sachs CEO Lloyd Blankfein was recently quoted as insisting that the Wall Street investment bank was "doing God's work".  If this is true, then the Lord indeed works in mysterious ways, since Goldman and the other banks played a pivotal role in the worst economic crisis in the US since the Great Depression.  And in Europe Goldman precipitated the sovereign debt crisis by assisting the Greek government in hiding its debt through complex securities.  In surveying the wreckage on both sides of the Atlantic it is reasonable to ask whether investment banks contribute any positive valued to the economy or to society at large. True, in the past investment banks were useful in helping productive private and public sector enterprises access capital.  But today this work of underwriting and distributing debt and equity securities on behalf of clients is a miniscule part of the business of investment banks, and contributes just a tiny fraction of the profits. No, today Goldman Sachs and its peers are giant casinos that make huge speculative bets on their own accounts.  The casino business has worked out rather well for Goldman and Deutsche Bank, but it was an unmitigated disaster for Lehman Brothers, Bear Stearns and Merrill Lynch - and for the American and German taxpayers.

There is no economic value in the casino activities of these banks, other than the trickle-down benefits from the obscene bonuses to Ferrari dealers, Greenwich landscapers and high-priced prostitutes. Often, the enormous profits earned through the casino activity is at the expense of the bank's clients.  Deutsche Bank has inflicted long-term damage on its corporate and municipal clients by "advising"them to enter into risky interest rate swaps and then buying credit default swaps to hedge their position in these volatile transactions.  A court in Stuttgart recently awarded a Deutsche Bank client compensation of 1.5 million euros for a swap deal that went sour. But this is peanuts in comparison to what Deutsche Bank earned in fees, or to the $$billions that others have lost.  Deutsche Bank essentially bankrupted the German city of Pforzheim hy selling risky derivatives, and in Italy a judge charged Deutsche Bank, JPMorgan, Zurich-based UBS AG and Depfa Bank Plc with fraud linked to the sale of derivatives to the City of Milan, Italy’s financial and fashion capital.

This week's edition of Focus Magazin asks the question: Wozu brauchen wir eigentlich Investmentbanken?("What Good Are Investment Banks?"):

Nach Angaben der Bank für Internationalen Zahlungsausgleich (BIZ) wurden Ende 2009 an organisierten Börsen Optionen und Futures im Nennwert von 73 Billionen Dollar gehandelt. Doch der Schattenmarkt ist um ein Vielfaches größer. Im Telefonhandel „Over The Counter (OTC)“ zählte die BIZ per Ende Dezember offene Kontrakte im Volumen von 615 Billionen Dollar. Das ist das Elffache der jährlichen Weltwirtschaftsleistung. Vor Lehman Brothers lag das Derivatevolumen gar bei 684 Billionen Dollar.

(According to the Bank for International Settlements (BIS) the official exchanges traded options and futures with a book value of $73 trillion at the end of 2009.  But the "shadow market" was many times this volume. In telephone trading through the Over the Counter market (OTC) the open contracts amounted to $615 trillion at the end of December - or 11 times the annual global gross economic activity.

Doing God's work?  I don't think so.  Besides, God couldn't afford the salaries and bonus packages at Goldman Sachs.

Comments

[Bela Desai]

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[John]

From the social point of view I don't think they add any value. From economic point of view investment banks do add value to customers. https://banksonline.net