Commentaries
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Rates rush may end in tears
Investment banks have made out like bandits over the first half of this year, largely from so-called “flow” businesses, like rates and foreign exchange (FX) that have been unlikely beneficiaries of the credit crisis. This has tempted several other investment banks to enter or
expand in those businesses.
However, the volatility and lack of competition that widened bid-offer spreads are disappearing fast. The underlying business is commoditised and requires massive scale. Only a handful of players will make money, and even then they may not make very much.
Before the crisis, FX and rates — the collective term for trading government bonds and interest rate derivatives — were, like cash equities, something of Cinderella businesses. Trading currencies and government bonds — and even the associated derivatives — was seen as an unglamorous business, but one that investment banks had to be in in order to be taken seriously.
During the credit boom, the rates business became steadily less appealing. It gradually shifted from being one in which clients called a few brokers to get a price to one where the majority of transactions were done electronically. These new platforms blew away the brokers’ mystique because clients could see prices for themselves.
Bob Diamond in the red
Just how profitable is Barclays Capital?
At first glance, the answer would be: very. According to Barclays’ results, Bob Diamond’s investment banking empire made a £1bn profit in the first six months of the year, double last year’s figure. That’s despite continuing hefty write-downs on toxic assets.
Indeed, as other parts of Barclays succumb to the economic downturn, Barcap, buoyed by last autumn’s acquisition of the North American operations of Lehman Brothers, more or less appears to be keeping the bank afloat.
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The Wall
