Masters of the Universe: A Case Study of the Global Investment Banking Sector
Most of us would have heard of the globally famous Investment Banks such as Goldman Sachs, JP Morgan, and Chase Manhattan as well as Deutsche Bank.
Indeed, for aspiring and working professionals alike working in these investment banks is a dream come true not only to the handsome (some would call it obscene) pay and perks, but also due to the glamour and prestige associated with working in them.
Masters of the Universe Come Crashing Down to Earth
Having said that, it is also the case that ever since the Global Financial Crisis of 2008 broke out, Investment Bankers have been pilloried and blamed for the crash as well as criticized for their continuing Million Dollar Bonuses at a time of general misery and economic hardship.
Of course, there are some who claim that the Global Financial Crisis (GFC) of 2008 was an inevitable aspect of the free market capitalist societies we live in and hence, it is unfair to blame bankers alone especially when the governments allowed them to take risks and the regulators looked the other way instead of enforcing rules and regulations.
Thus, it is more the reason to take a critical look at how Investment Bankers operate and how Investment Banks contribute as well as are impacted by the larger societal and political and more importantly, economic forces at work.
Indeed, the fact that Global Investment Banks are in a cutthroat competition for business means that it is very crucial to investigate the larger and the b broader macroeconomic and political environment that shapes their businesses and determines their profitability.
Thus, the accompanying PESTLE Model, Porter’s Five Forces, and the other investigative frameworks would give the readers a fair idea in a case study format about the internal and the external forces at work for the Global Investment Bank Industry.
As the title of this case study indicates, Investment Bankers tend to view themselves as Masters of the Universe in their ability to influence and shape the financial world.
Investment banks are subject to the rules and regulations that are in place in the various countries in which they operate and since most of these rules are framed by politicians for good or bad, the political force at work plays an outsize role as far as shaping the future and the present of the Investment Banks are concerned.
For instance, across the Western World, Investment Banks have been lightly regulated for decades thereby allowing them to what some have called the “Masters of the Universe” in an apparent reference to their Godlike powers to conjure financial magic and provide their clients with an array of ever increasing sophisticated products.
Having said that, there was a time in the immediate aftermath of the GFC when the administration of President Obama took bold steps to regulate and rein in the Investment Banks. Of course, the present state of play is that the Trump Administration and the Congress and the Senate are busily rolling back all the regulations put in place and while there are fears that this can lead to another recession, the fact remains that Investment Bankers are back in the game again.
The impact of the broader economy on the Investment Bank is clearly obvious and self evident since there is a symbiotic relationship between the Economy and the Banks as each feed on the other for sustenance and survival. This is the reason why Investment Banks tend to do well during boom periods and tend to take a hit during busts or recessions.
While some hedge funds and banks are trying to find a way to juggle the busts as well so that they can continue their profits, more commonly, it is taken for granted that the broader macroeconomic health is very important to the success of the banks.
Having said that, many Hedge Funds actively cause recessionary conditions as their name implies that they hedge against losses in the stock markets and the economy and consequently, they are finding creative ways to survive and be profitable during recessions as well.
As mentioned in the beginning, Investment Banks have a Halo around them among certain members of the society such as Management Students and Professionals, whereas the Working Class tends to view them with suspicion and distrust for their high rolling and high stakes gambling financial products that often cause the Middle Class grief and loss. This is the reason why many Investment Banks tend to have lavish CSR or Corporate Social Responsibility Budgets mainly as a way to give back to society as well as a way to ensure favorable perceptions among the working and the middle class as well as the underprivileged.
Indeed, some Investment Banks such as Goldman Sachs insist that their employees spend time in socially oriented initiatives and link their performance bonuses to the same with a view to ensuring that they get to know how their businesses impact societal stakeholders.
Technology plays a very important role in shaping the operations of the global investment banks as they rely heavily on cutting edge technologies to implement their financial products.
Indeed, technology is so pervasive in the global investing banking community that sometimes it is hard to distinguish between a financial product that is technologically driven with minimum human interference and a product that in earlier years and decades was the result of entire human effort.
In other words, with algorithms taking over, investment bankers no longer sell financial products that are based on human driven aspects but sell complex and sophisticate derivatives and schemes where the Algorithms make all the decisions.
As the Investment Banks mainly deal with the high net worth individuals and large corporations and with some high profile clients thrown in, their business is extremely sensitive to the legal aspects of doing business. This is because they are in the business of securing deals for their clients and hence, any slip up due to errors of omission and commission can easily land them in legal trouble.
In addition, they are also subject to highly specialized and detailed laws and rules and regulations in the countries in which they operate and hence, Investment Banks are known to insist on elaborate fine print terms and conditions as a prerequisite to their interactions with their clients.
Having said that, despite all the precautions that they might take, Investment Banks are routinely sued by assorted clients and individuals as well as regulators and others for various reasons. These include skirting the rules and regulations and making more profits that accrue at the expense of hapless clients, breakage of NDAs or Non Disclosure Agreements, and the like.
As mentioned earlier, in recent years, Investment Banks have become conscious of their social and environmental responsibilities and this is the reason for their renewed interest in helping society as well as taking care of environmental concerns.
Indeed, given the bad press that they have received since the GFC of 2008, Investment Bankers have begun to court activists and think tanks as well as the media as a PR (Public Relations) exercise so as to improve their image and standing in society.
Despite all this, they are still viewed in a hostile manner by large sections of society and hence, they need to do more or better, change the way they approach their businesses by promoting more CSR oriented banking and investment activities.
Porter’s Five Forces
Bargaining Power of Buyers
Investment Banking is a buyer’s market as far as the ability to do business and sign up clients and retain existing ones are concerned.
In other words, clients and buyers hold all the aces and pull all the strings which can lead to some serious asymmetries in the way the power equation between the Investment Banks and their clients is concerned.
Bargaining Power of Suppliers
This force is largely minimal in its impact as Investment Banks typically deal with a close set of suppliers who can be replaced at will as well. Having said that, there are still some negotiations where Investment Banks do have to bow down to the wishes of the suppliers.
Threat of Substitutes
As Investment Bankers vie for business not only with each other, but also from Management Consultancies that often share the same goals of maximizing revenues and increasing profitability of their clients, there are easily available substitutes for clients and entities to choose from. In addition, given the multiple options in the form of Hedge Funds, Pure Play Banks, Consultancies, and Individual or Freelance Consultants, Investment Bankers do have serious competition as far as their efforts to capture the mind space of their clients is concerned. This is the reason why Investment Bankers are known to court their clients in an elaborate courtship process so as to preempt others from being chosen.
Entry Exit Barriers
While anyone can theoretically become an investment banking entity in the West where new ventures are often encouraged and can be setup easily, securing new clients can be a hard task as the tendency of the various stakeholders is to play it safe and deal with known and reputed and well established banks.
In addition, in Asian countries such as China and India, setting up an Investment Bank from scratch is a Herculean Task mainly due to the labyrinthine rules and regulations as well as deep rooted cultural attitudes about banking and in particular, high stakes investment banking. Thus, it can be said that while on paper, Entry Barriers seem to be minimal, practically speaking, entering into the uber competitive investment banking market can be quite tough.
The global Investment Banking landscape is extremely competitive and this is the reason why many top notch investment bankers spend time on the road (so to say) or traveling around the world pitching to the clients.
Indeed, this aspect of courting the clients is something that takes much of their time as they not only need to seek new clients but also retain existing ones. Moreover, given the fact that the global investment banking industry is in the throes of change brought about by technology and globalization, there is bound to be that much more extra and intensive rivalry which can lead to a no holds barred approach from the players leading to more pressure on the investment bankers.
Having said that, it is also the case that the Global Investment Banking Industry is still dominated by a handful of banks and hence, this aspect must also be taken into consideration when discussing the rivalry.
While the Masters of the Universe tend to give us more exotic and sophisticated financial products which are increasingly complex and Algorithm driven, there are some limits that they have to observe to restrain themselves from excessive risk taking.
Indeed, given the fact that the Investment Bankers crashed to Earth during the GFC of 2008 and in the process, nearly took the entire global economy down, perhaps a little more humility and a more real concern for the underprivileged might do them good.
However, recent trends seem to suggest that Investment Bankers have not learned the lessons of the past, and this is cause for serious concern for all stakeholders.
To conclude, it is time that the Masters of the Universe realized that while they can set the pace, if they lose control as they did in 2008, chances are that they would be taking down the entire global financial system with them.
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