Another idea for breaking up the banks
Justin Fox tried to adjudicate a debate on Friday. In the blue corner is Philip Augar, a British investment banker who wants to go back to a very British form of investment banking (think all those houses with Hogwarts-style names like Rothschilds and Schroders and Kleinworts and Warburgs), where advisory shops make their money from fee income, and leave the trading to the
Americans big broker-dealers.
In the red corner is our old friend the Epicurean Dealmaker:
I-banks are underwriters of securities. As such, they *must* straddle the wall between investors and issuers of securities. They see both sides of the trade: market *demand*, and issuer *quality*. If no-one stands there, who can minimize information asymmetry and maximize trust? No-one.
To which Augar replied:
A radical shake up along the lines I suggest is the only way to let the market operate properly so we don’t get mergers that fail to deliver for acquiring shareholders, IPOs that underperform after the first day pop, share prices that move ahead of deal announcements etc etc.
Justin says that he doesn’t know which of the two is right; my feeling is that both of them are wrong. On the one hand, advisory shops have existed for a very long time, and still do exist in the form of such banks as Lazard, Greenhill, and Jefferies. The old-fashioned British way of doing things did seem to work OK, although admittedly it didn’t take long for most of the advisory shops to get gobbled up by the big broker-dealers.
On the other hand, Augar has got to be kidding if he really expects us to start worrying greatly about mergers that fail to deliver for acquiring shareholders, or underperforming IPOs. This is not a debate about poor buy-side investors investing in bad deals and blaming the banks. And in any case M&A advisory boutiques are just as likely to persuade their clients to overspend on an acquisition as their sell-side counterparts are. The question is whether splitting the trading and advisory sides of the banks would do anything to reduce systemic risk, and I really can’t see how it would.
Augar’s bright idea, then, is I think a solution in search of a problem. I’m not convinced by TED’s pleas to keep the two sides of the business apart, but I also see no reason why separating them would do much if any good.