OTHER PEOPLE. ' S MONEY. AND HOW THE BANKERS USE IT .. need money, and selling to those seeking invest ments. The banker performs, in this. Other People's Money, and How the Bankers Use It by Louis Dembitz Brandeis. Book Cover. Download; Bibrec. This is the greatest question of all; and to this, states- 2 OTHER PEOPLE'S MONEY men must address themselves with an earnest determination to serve the.
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Other Peoples Money - blocwindcotssidi.cf - Ebook download as PDF File .pdf), Text File .txt) or read book online. Editorial Reviews. Review. "Thanks for writing this book. Only [John Kay] could have done it. This is going to be a classic." --Frank Partnoy, Professor of Law and . Other People's Money. By John Kay. (PublicAffairs, pages, $) rom to , the finance sector of the American economy grew to.
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Other people's money Louis Dembitz Brandeis. Other people's money Close. Want to Read. Are you sure you want to remove Other people's money from your list? Stokes in New York.
Written in English. Subjects Banks and banking , Finance , Banking law , Accessible book. Places United States. Table of Contents Our financial oligarchy. How the combiners combine. Interlocking directorates. Serve one master only! What publicity can do.
Where the banker is superfluous. Big men and little business.
A curse of bigness. The failure of banker-management. The inefficiency of the oligarchs. Classifications Library of Congress HG The Physical Object Pagination xv, p. Check nearby libraries with: Share this book Facebook. History Created April 1, 7 revisions Download catalog record: The rise of the trading culture has no single explanation but is the product of a series of developments, interrelated in origin and cumulative in impact.
The globalisation of financial markets was part of the story, and so was the breakdown of the global financial architecture devised by the Allied Powers in in a conference at Bretton Woods a beautiful location in remote New Hampshire intended to be difficult to access from New York or Washington.
The creation of new markets in derivative securities, and the development of the mathematics of financial markets needed to analyse them, was another factor. Regulation and deregulation played a large, but partly accidental, role: few of the consequences of regulatory policy changes were intended. Institutional reorganisation played a part; traditional forms of business organisation, such as the partnership and the mutual, were folded into public limited companies.
The support for free markets that followed the elections of Margaret Thatcher and Ronald Reagan influenced public and business policy in many ways.
Those needs remain much the same: we need financial institutions to process our payments, to extend credit, to provide capital for business. We want financial institutions to manage our savings and help with the risks we face in our economic lives. Some aspects of these services are better; many are not. Information technology has changed the ways in which financial services are delivered.
But there has been no transformation in the services provided to customers comparable to the transformation in the nature and political and economic role of the industry that provides them. The process of financialisation had its own internal dynamic. There had always been speculative activity in foreign exchange markets, but as the post-war system of fixed rates established at Bretton Woods came under more and more pressure, the typical speculator was no longer an individual dealing on his own account but a trader employed by a large financial institution.
The traditional business of converting foreign exchange for customers and making an appropriate margin on the conversion became linked with taking positions in currencies to benefit from anticipated changes in their value. The idea was to apply the same type of contract to foreign exchange and subsequently to other financial instruments.
Butter and eggs would soon be left behind. This was the beginning of the development of markets in derivative securities. It is not a coincidence that the University of Chicago was then and is today a leading centre of the study of financial economics. In the following year two members of its faculty—Fisher Black and Myron Scholes—would publish a seminal paper on the valuation of derivatives. Futures were not the only kind of derivative.
An option gave you the right, but not the obligation, to download or sell—you could use an option to insure yourself against a rise, or a fall, in price. As derivative markets grew, people used them to back their judgement on more or less anything—not just foreign exchange, or interest rates, but the possibility that a business might fail, a mortgage would default or a hurricane would strike the East Coast of the USA.
This revolution in the technology of finance was matched—indeed was only possible because of—the parallel revolution in information technology. Today every trader has a screen. The Black—Scholes model, and the many techniques of quantitative finance that came out of Chicago and elsewhere, could not have been widely applied without the power of modern computers.
Regulation also promoted the growth of a trading culture. The growth of the Eurodollar market demonstrated that regulatory anomalies could be used by banks to attract business.
And by countries. Governments that promoted the interests of these banks could make regulatory arbitrage easier. The Bank of England, which in the s saw advocacy of City of London interests as one of its principal functions, actively encouraged the growth of the Eurodollar market. Regulatory measures intended to make the financial system safer may, as Regulation Q had done, have had the opposite of the intended effect: the consequence of the rule was to increase system complexity and to take transactions out of the regulatory net altogether.
Inability, or unwillingness, to learn that broader lesson about regulation would have severe, and continuing, consequences.
Regulation Q was one of the many reforms introduced as a result of the Wall Street Crash. But the most important was the establishment of a Securities and Exchange Commission SEC with broad regulatory oversight of the activities of financial institutions and listed companies. The focus of regulation was on securities text. The new commission would be performing its task well if it facilitated the issue of securities and promoted exchange. As the agency increased the scope of its activity, if not necessarily its effectiveness or authority, that philosophy permeated the regulation of finance.
In the s fixed-income trading was added to the list of active markets. Bond trading had previously been a backwater for the likes of Nick Carraway: in London it was an activity in which success depended largely on being born into the right family.
Lew Ranieri had been born in Brooklyn, and not to the right family—he had begun his Wall Street career in the mailroom of Salomon Bros. But his invention of the mortgage-backed security would transform the bond market. The growth of securitisation, not just of mortgages but of all kinds of financial claim, changed the nature of banking for ever. The mortgage-backed security consisted of a tradable package of mortgages.
This idea could be applied not just to mortgages but also to other consumer loans—credit card balances, for example—and to small business loans. Credit and interest rate exposures, traditionally managed within banks, could be reduced or eliminated through markets.
Swap markets enabled banks to manage interest rate risk: a loan whose rate was variable annually might be exchanged for a loan fixed for ten years. These markets received a boost later in the s, when the Basel rules on bank lending tended to treat asset-backed securities more favourably than the assets that went into them. In the s two changes occurred that gave rating agencies a central place in the financialisation process.
Other people's money, and how the bankers use it
Ratings text. Many investors and traders did not care much what was in the package so long as it achieved the required credit rating. The collapse of the asset-backed securities market would be at the centre of the global financial crisis.
The elements of the new trading culture—based around fixed income, currency and commodities, and turbo-charged by derivatives— were now in place. Markets in shares were no longer the centre of speculative activity. Fixed interest, currency and, later, commodities FICC were central to the new trading culture.
But the environment in which McCoy worked was very different. The changes that occurred in the structure of financial services firms are described in more detail below, but within these firms the dominant ethos changed radically. The world Wolfe and Lewis described was aggressively male there would in due course be a few women traders, but the links between testosterone and trading would become the subject of serious academic research. Young men—some with high educational qualifications, some with none—suddenly found themselves in possession of amounts of money far in excess of those they were capable of handling.
But there had always been a few traders who operated independently, raising funds from sophisticated investors. The outcome was profitable for hedge fund promoters although not, in general, for their investors.
Some hedge fund managers made extraordinary sums. The rise of the trader and the development of a trading culture cannot be dissociated from the political climate of the times: the power of a market fundamentalist ideology, the election of Thatcher and Reagan, the collapse of the Soviet Union and the discrediting of central planning as an economic system. The dominant ideology of the times legitimised the more aggressive pursuit of self-interest and encouraged a different and more limited view of the social responsibility of the large business text.
Markets were deemed to be good, and more markets were better.
It was not possible to have too much of a good thing. But the economic philosophy of politicians such as Thatcher and Reagan was the product of moral conviction rather than technical economic argument. And their moral convictions found little to applaud in the culture of the trader. The Thatcherite emphasis on hard work and selfreliance sat alongside a belief that compassion should be a private virtue rather than a social practice.
These are attitudes very different from the greedy individualism and sense of personal entitlement characteristic of much of the finance sector today. New Markets, New Businesses I would like to pay tribute to the contribution you and your company make to the prosperity of Britain. During its one-hundred-and-fiftyyear history, Lehman Brothers has always been an innovator, financing new ideas and inventions before many others even begin to realise their potential. Modern finance begins, like so much else, in the Renaissance, with the merchants of the Italian city-states.
The oldest surviving bank of all is Monte dei Paschi Bank of Siena, founded in , though its future has recently been in question. The Bank of Scotland was founded in , and the Royal Bank in The long history of all these institutions has been threatened by a generation of financiers who mistakenly thought they knew much better than their predecessors.
But the business of all of these firms has changed as economies have developed. Yet that evolution has followed very different trajectories. Through the nineteenth and twentieth centuries the financial services sectors of Britain, the USA and continental Europe developed in distinctive ways.
In the two last of these merged to become National Westminster Bank. Thus the broad structure of UK retail banking changed very little in the course of the twentieth century. Morgan—played a major role in financing large US businesses in steel, railways and oil. But populist suspicion of finance, and the wide US attachment to the life of small communities, limited the development of interstate banking.
Depositors feared for the security of other, similar banks, which suffered runs even if their underlying finances were sound. The events of —33, in which a financial crisis became an industrial depression, threatened not just economic prosperity but political stability.
A Senate inquiry into these events was led by a brilliant chief counsel, Ferdinand Pecora, who single-handedly destroyed the reputations of many Wall Street institutions and Wall Street figures. The Glass—Steagall Act of imposed the separation of commercial and investment banking. The House of Morgan was divided into J. Morgan, the commercial banking arm, and Morgan Stanley, an investment bank. In both Britain and the USA different functions within the financial system were provided by different institutions.
Commercial banks operated the payments system and met the short-term lending needs of their customers. If the downloader wanted to sell these securities, he or she would contact a stockbroker, who would negotiate the trade with a specialist also called a jobber or text.
While banks undertook some mortgage lending, most such loans were made by specialist non-profit businesses—thrifts in the USA, building societies in the UK. Banks specialised in what I will call the deposit channel, diverting short-term savings into relatively low-risk activities.
There has always been a need for a parallel investment channel, to facilitate the deployment of longer-term savings. The Bank and the Royal Bank of Scotland are among the oldest surviving institutions in the deposit channel even if their survival was a close call. The Bank of England, which saved them, was also founded by a Scot.
My parents and teachers, believing my destiny was to be an actuary, sent me to work at Scottish Widows in the school holidays. These bastions of finance developed the two principal mechanisms—pension funds and life insurance on the one hand, and pooled investment funds on the other—by which investment is still intermediated today.
The distinction between deposit and investment channels has been less marked in continental Europe, which has a long tradition of universal banks. These institutions provided a full range of financial services to both industrial and personal customers, and themselves held significant shareholdings in major companies.
However, Paris, Berlin and Frankfurt were never global financial centres in the manner of London text. Insurance companies and, to a lesser degree, banks have remained the principal vehicles for intermediating long-term investment in these countries.
The investment trust was exported to Britain and the USA but proved to be a vehicle for many Wall Street excesses in the years up to the crash.
As a result of US regulation and saver scepticism, investment trusts closed-end funds have been supplanted by mutual funds open-ended investment companies. I will describe these different kinds of investment vehicle more fully in Chapter 7. Bankers have never been shy of making profits, but the local bank was seen as a community institution, along with the church and the hospital, and the bank manager was a community figure, alongside the doctor and the lawyer.
At state or national level, banks enjoyed a special relationship with government, entailing both privileges and responsibilities.
Scottish Widows like Standard Life was a mutual, owned by its policyholders, and this was true of many European and some American insurance businesses. The banks that failed in were very different organisations from the institutions that they had been for many years—even centuries.
The innovations pioneered by Salomon Bros, which created markets in loans, potentially undermined the traditional conception, and role, of a bank in channelling savings from depositors to borrowers.
Some thoughtful commentators believed that the financial institutions of the future would be narrow specialists. Supermarkets diversified into simple financial services, such as deposit accounts.
Private equity houses venture capital firms specialise in the provision of finance for business. Specialist hedge funds—tightly run speculative trading ventures such text. But, apparently paradoxically, the trend to specialisation was accompanied by a trend to diversification.
Regulation Q, which restricted interest rates, was successively relaxed and finally scrapped. The American finance sector, which had been publicly humiliated in , became a more and more powerful lobby. That lobby secured steady relaxation of the restrictions that had been imposed on the industry fifty years earlier. The separation of investment from commercial banking—the principle that had become synonymous in the public mind with the Glass—Steagall Act—was steadily weakened, although not finally repealed until The large British commercial banks, with the enormous capital strength derived from their retail deposit base, were immediate diversifiers.
These changes in the structure of banking were related to changes in the organisation of stock markets. Traditionally, downloaders and sellers of securities traded through agents, and the London and New York stock exchanges enjoyed a monopoly on trading in stocks.
A downloader or seller approached a broker, who would then contact the specialist who dealt in these stocks or fixed interest securities. The broker acted for the client, and was responsible for securing the best price. The market-maker tried to match downloaders and sellers: specialists had very little capital of their own.
Other People's Money
This was no golden age. Brokers cultivated relationships with corporate clients as well as private and institutional investors, and would promote the shares of companies with which they had such relationships. These brokers would favour selected clients with inside information. But venality was mostly held in check by widely accepted social norms. Commissions were fixed by the exchange, generally as a percentage of the value of the transaction.
But pension funds grew in size, and these funds and insurance companies which collected individual savings diversified from bonds to shares. These institutional vehicles would provide savers with benefits from liquidity and diversification. They would also provide professional management. And professional managers would download and sell much more frequently than private individuals—how else could they justify their fees? These managers were unwilling to accept the fixed—and high— commissions demanded by the cartel of traditional stockbrokers.
Asset managers could charge commission to the account of their clients, while office expenses would have to be met from their own pockets. From the s the structure of exchanges changed radically. The change had multiple strands, and causes. A broker is an agent; a dealer is a trader.
The rise of the broker—dealer blurred the distinction between two types of transaction. The conflict of interest inherent in the broker—dealer concept, and the name of Bernard Madoff, will recur in this book. The technological shift was paralleled by regulatory changes that encouraged competition between exchanges. Today there are multiple exchanges on which shares can be traded—the London and New York stock exchanges both own electronic exchanges which compete with their main markets.
In the twenty-first century the distinction between brokers—who acted for clients—and specialists—who made the market by matching downloaders and sellers—has effectively disappeared. The finance industry was historically characterised by several different types of business organisation. Commercial banks were generally structured as public companies, their shares quoted on the national stock exchange.In keeping with our real estate example, that is generally around 70 to 80 percent of the download price.
Today there are multiple exchanges on which shares can be traded—the London and New York stock exchanges both own electronic exchanges which compete with their main markets. The scene was set for the bizarre developments of the early years of the twenty-first century, in which the forced savings of Chinese peasants who had little choice about the economic decisions of their authoritarian government would fund the excess spending of American consumers.
The aggregate investments of these three companies on January 1. That is knowledge to which both the existing security holder and the or advertisement of a prospective downloadr is bankers' compensation fairly entitled.
With some considerable restructuring, the financial sector could once again be a valuable and useful system that makes our economy stronger and improves our overall quality of life. Lew Ranieri had been born in Brooklyn, and not to the right family—he had begun his Wall Street career in the mailroom of Salomon Bros. Though many particularly of these communities.
Now the law should not undertake except incidentally in connection with railroads and public-service corporations to fix bankers' profits. And with no personal attachment to the money, they were in no position to be held accountable for any losses that might occur.
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