Investment bankers reign supreme

The financial sector is always a work-in-progress- it is forever being remade. One big change is the disappearance of many merchant banks and brokerages- Warburg, Smith Newcourt, Morgan Grenfell, Kleinworth Benson- and, more recently, investment banks themselves. In the US, three of the top three investment banks disappeared in the 2007 crisis- Merrill Lynch, Bear Stearns and Lehman Brothers. The biggest, Goldman Sachs, had to convert itself into a bank.

Whatever the fate of investment banks, investment bankers today reign supreme, as John Kay points out in an article in the FT. The banks may have swallowed the investment bankers but it was the investment bankers who got the upper hand over commercial bankers:

In 2011, the chief executives of three of Britain’s four large banks, like their counterparts at Citigroup, Deutsche and UBS, are men who have built their careers in investment banking. When António Horta-Osório of Lloyds returns to health, it will be four out of four. When the titans of global finance today exchange reminiscences, only one man has different stories to tell: Brian Moynihan of Bank of America, who was in charge of consumer and small business banking before he assumed the post of chief executive. 

Kay says that investment bankers had to grab control as they felt suffocated in the conservative culture of retail banks. This does not explain why this happened.Well, it was a matter of who brought in the moolah. Investment banking divisions contributed significantly to profits, often the biggest chunk, as at Deutsche. He who pays the piper calls the tune. If it is investment bankers who help keep shareholders happy, they are bound to be in the drivers' seat. What this has done to the culture of the traditional bank is worth exploring. The more interesting question now is what happens if regulation in the US and the UK goes through and investment banking activities are demarcated from core banking activities.