As to the failure of Wall Street firms

[Biggus Piggus]

We should have learned from the Internet bubble that the Wall Street business model was broken.  The bubble underscored how investment bankers were making enormous piles of money simply for being there.  They added no value.  Traditional retail and institutional stock brokers added very little value; they were merely a sales channel.  Trade execution and market making added very little value and in the past was stupidly, hilariously profitable for no good reason.  All of these businesses, since 2000, have seen their profit margins squished like bugs.

Where did Wall Street go to make its money?  For the most part, the bulge bracket banks resorted to fostering the market for complex debt derivatives, enabling investors to divide different aspects of credit obligations and invest in whatever they desired.  Bet on long duration, bet on short duration, bet on credit quality, bet against it, bet on the middle tranche, bet on early payoff, bet against it, on and on and on.

Once again, Wall Street was making money from manufacture not service.  They dumped these products into the market and asked investors to trust them.  And they jacked up their leverage, 30:1, 40:1, while doing so, without understanding how they had set themselves up for disaster should the outrageously robust housing market turn on its heel.

Investment banks, for the most part, have little reason to exist now.  Brokers have turned into financial advisors, and they can work for a wide variety of financial entities.  People do need that service, if the ex-broker really can give good advice rather than sell someone's proprietary products at an egregious markup.  Companies still need to raise capital, but that whole process needs to change, because the banking-handoff-to-research model is dead.  And there is a place for derivatives, but it needs to be managed by people much smarter than investment bankers, whose primary occupation is to deceive you into trusting them.

We do not need Merrill and Lehman anymore.  It's a sign of how inefficient the stock market is that these companies came into 2007 with record-high stock prices.

[Fletch]

Question: WB keeps saying they have 50 billion in tier one capital and will add another 6 bil. in the next few months. They have 8% and the regulation requirements are for 6%. My question is what has to happen or can happen for that tier one capital percentage to drop to say, 5.75% or lower. This is something that I do not understand. Please advise.

[Biggus Piggus]

Question: WB keeps saying they have 50 billion in tier one capital and will add another 6 bil. in the next few months. They have 8% and the regulation requirements are for 6%. My question is what has to happen or can happen for that tier one capital percentage to drop to say, 5.75% or lower. This is something that I do not understand. Please advise.

If they don't meet federal requirements, the Federal Reserve can take them over.  Their accounts would be handed to another, sounder bank.  The other assets and liabilities, who knows.

[Biggus Piggus]

Investment banks, for the most part, have little reason to exist now.

Goldman and Morgan Stanley agree, it appears.

http://seekingalpha.com/article/96579-goldman-morgan-stanley-become-bank-holding-companies

[HognotinMemphis]

Goldman and Morgan Stanley agree, it appears.

http://seekingalpha.com/article/96579-goldman-morgan-stanley-become-bank-holding-companies

I've been reading seekingalpha.com for 2 or 3 years now. These guys posting there are fairly intelligent.