Question From a Student:
I have a couple new questions. First, if banks like Citi and BoA are so horrible at managing assets, are they only afloat because the government has helped them out in the past several decades? Also, what would be the hypothetical situation if one or several of these banks collapsed because the government didn't bail them out? Finally, assuming that these banks fail, could the smaller, profitable, and efficient banks fill in the financial vacuum before the entire system collapsed like in the Great Depression?
About those small investment banks that don't pay as much and thrive. What are the names of some of those banks? Maybe we could have a look at them next Tuesday
Last question. How can a prospective investor find out a company's business model, strategies, and inside information? I'm sure that this information would be just as valuable as the key statistics that is published on Valueline and Yahoo.
About those small investment banks that don't pay as much and thrive. What are the names of some of those banks? Maybe we could have a look at them next Tuesday
Last question. How can a prospective investor find out a company's business model, strategies, and inside information? I'm sure that this information would be just as valuable as the key statistics that is published on Valueline and Yahoo.
A Response in the Comment Section Below
To answer your first question, you have to understand that the bad management of assets was something that developed over time. Currently, the only reason Citibank and BofA are alive is due to government money that was not part of Congressional approval through the TARP. The only other way to shore up these institutions would be to nationalize them.
ReplyDeleteIn the beginning, all banks that last for a certain period of time were well run. However, success breeds overconfidence or complacentcy. Either way, those within the firm feel that they can handle more that they should.
Take a look at how many times Citibank has teetered on the brink of failure. Their failure isn't due to the lack of qualified and smart people. Instead, Citi routinely takes on too much risk during the good times and is risk averse during bad times. This reflects the lack of planning and discipline on their part. What makes this situation worse is that the company is continually bailed out which leads to moral hazard.
The financial vacuum that you speak of could not exist without the regulators allowing these institutions to get so big. Can the smaller banks handle the load of an institution the size of Citigroup? Absolutely.
If you want to know about the mid-sized investment banks go to wikipedia (http://en.wikipedia.org/wiki/List_of_investment_banks ) and view the list of investment banks that are out there.
Regarding your question on business models, strategies, and inside information; it is unlikely that you'll get any useful information from inside any company. If you ask the employee of the company that they’re working for, they tend to believe that they know more about the company than any outsider. In reality, better and more accurate information can be found from third party sources like business magazines, newspapers and other non-industry publications. Insider information, aside from being illegal, tends to be exaggerated and one sided.
The true advantages are gained by an investor’s ability to think economically. What I mean by this is that you need to be able to think through the steps to their ultimate conclusion with incomplete information. For example, while the tobacco companies were being sued right and left, the government decided to get into the act. The government finally got the tobacco companies to agree to pay, for 25 years, a portion of their profits back to the states. As an economist, I saw this as an implicit guarantee for the tobacco companies to stay in business. The government would never outlaw smoking and the states would do everything they could to ensure the tobacco companies could stay in business.
As it turns out, the states sold bonds based on the future expectation of income and they used their police force to enforce stricter regulation to stop the illegal sale of cigarettes. All of this leads to the tobacco companies increased revenue even though they have to pay crazy taxes to the states.
Thinking through the process, you could strategically invest based on information that is not necessarily provided by insiders. Valueline and other sources like it are only the starting point for understanding a business. Always take in all third party information when you can. Avoid all information that is produced by the company or the industry because they'll always tell you that things are getting better.