Banking on Change (Part 2)

So are they bankers, or are they traders?

That’s the question for the big banks. And it’s a fair question for Congress too, as they debate how we should reform our financial system.

Big securities dealers used to be called “bulge-bracket” firms. In the past, they mostly helped companies raise money by selling stocks and bonds, and would trade these securities for their own account. Their trading profits were a big part of their business.

By contrast, banks that helped companies get loans usually kept a large portion of that loan for themselves. Trading the loan wasn’t part of the plan. But as loans got bigger the banks sold more and more of their loans off, and the bulge bracket firms held more and more of new securities on the balance sheet. Now, the line between banking and trading has gotten pretty blurry.

Proprietary trading is now the whipping boy of our financial sector, while holding loans is somehow saintly. But holding pieces of their own deals is what destroyed the capital of Bear, Lehman, and Merrill, and almost brought down UBS and Citibank. Prop trading had nothing to do with it.

It’s ironic that trading is now seen as risky when it’s the banking activities that brought our financial system to the brink. It’s surprising that no one in Washington can seem to figure this out.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By | 2014-09-05T18:47:24+00:00 April 28th, 2010|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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