Time for the 21st Century Financial Institution

by francine Hardaway on September 17, 2008

I woke up this morning to Jim Cramer calmly speaking about the death of his industry, followed by a clip of him freaking out a year ago on his show. In the interim, he’s been medicated I guess. Or as he says, “no point in ranting now. It’s over.” In the clip, he said “my people are losing their livelihoods.” He is now being hailed as prescient.

Of course all the brokerages are going out of business. Didn’t you know they would when the Internet and online trading started? It just took longer than I thought.

Jim Cramer said this morning “Our industry is going out of business.” Right. Slowly and agonizingly over ten years. I remember when I originally thought Merrill Lynch would go out of business. And the part of the business that used to be theirs, the retail brokerage, really got lost a long time ago. When online trading first began, I knew it would only be a matter of time before the standalone brokerages began to have trouble. And just at that time, if I remember correctly, the Glass-Steagall Act, which forbade banks to have brokerages, expired.

So everyone became an equities trader: banks, brokerages, you and me.

Truthfully, the financial industry needs an overhaul. It is overly complicated, secretive, and concentrated in a few hands. In this day of transparency on the Internet, when sites like Covestor exist, these old time Lehmanns and Merrills shouldn’t exist.

Yes, the mortgage-backed securities bubble was the proximate cause, but the securitization of mortgages happened because the securities guys were looking for a way to make fees, and securitizing mortgages was a new way. That’s relatively new, too.

But I was just listening to Om interview Bill Hambrecht, and Om refers to it as a slow motion car wreck. That’s more like it. Hambrecht points out that the retail part of the brokerage business (the part that commoditized) funded a lot of the research investment banks did, so they got involved with these securities absent adequate research (translation: “blindly, without knowing what they were buying”)

Hambrecht says Silicon Valley hasn’t been affected because most IP companies don’t take on debt and don’t need banks as much. But there will be fewer investment bankers to take companies public unless they are very big. This creates a market niche for someone who will do smaller deals.

As usual, it’s an opportunity for somebody in a meltdown like this. But it’s not the old players, because the rules have changed. I wonder if I can get a Twitter account for my new (proposed) bank. The more transparency the better.

{ 3 comments… read them below or add one }

mike connolly September 17, 2008 at 10:57 pm

The Glass-Steagall Act did not expire, it was repealed.
On November 12, 1999, President Bill Clinton signed into law the Gramm-Leach-Bliley Act, which repealed the Glass-Steagall Act of 1933. One impact of this repeal is that certain advisory activities of the banks are now regulated by the Investment Advisers Act of 1940.”
Unfortunately . . . .
Mike Connolly

Francine hardaway September 18, 2008 at 6:46 am

Thanks for the correction.!

Michael VanDervort September 18, 2008 at 9:13 am

Cramer is fortunate to have reinvented himself a long time ago. He can still do what he does, and might even make a good co-branding partner for your Equities & Securites Division of your new bank!

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