Postcrisis economy: calmer but slower
With no investment banks and tighter regulation, experts see a less dynamic recovery ahead.
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"By shifting from an investment bank to a commercial bank, it gives them access to the Federal Reserve's discount window," says Scott Brown, chief economist at Raymond James & Associates in St. Petersburg, Fla.Skip to next paragraph
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The discount window allows eligible financial institutions to borrow money over the short term to meet short-term liquidity needs. But commercial banks are also more conservative, concerned about preserving assets while Wall Street is usually more risk oriented. In the past, Wall Street usually funded "the next new thing," growth drivers that led the economy out of its slump. After the last recession, this was housing and mortgages. In the recession before that, it was technology and telecommunications companies. This time, Dickson thinks it would have been alternative energy. But "that whole area is now going to take longer to develop than it otherwise would," he says.
Others aren't so sure the demise of the pure investment banking houses will have that large an impact.
"They can still run an investment bank, just more conservatively," says economist Lyle Gramley. It's hard to measure how much the investment banking community adds to economy, he adds. "Investment banking is like the dark matter in the universe. We know it's there, we're not sure what good it does, and we know it creates black holes."
Investment bankers, however, have a much higher tolerance for risk than commercial bankers. Sung Won Sohn, former president of Hanmi Bank, recalls "looking at deals that I would not touch with a 10-foot pole" and then watching investment banks snap it up. "Something like that is going to be less frequent," says Mr. Sohn, now an economist at California State University, Channel Islands.
With the greater risk that investment banks used to take came greater rewards. Investment banks have historically paid out enormous bonuses at year end. Last year, Wall Street handed out in excess of $30 billion in bonuses, according to Bloomberg.com. Goldman Sachs paid out $12.1 billion in bonuses, up from $9.88 billion the prior year, the news service reported. The chairman of the company, Lloyd Blankfein, made $54 million.
"This has always been a problem but it's been between stockholders and activists and management," says Doug Roberts, director of research at Channel Capital Research Institute in Shrewsbury, N.J. "Now Congress is concerned: If they give money, should they still get these huge bonuses?"