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The relevance is: "investment banking" may have done more harm than good. (As in, consider their whole existence. What might the world have been like without

by palish 15y ago

The relevance is: "investment banking" may have done more harm than good. (As in, consider their whole existence. What might the world have been like without investment banking?)

RockyMcNuts 15y ago
do you think Google would exist, and they would have been able to raise money for a massive server farm, if initial investors didn't know they would be able to IPO it if it was successful? do you think the market for YC startups would be hot if there was no public stock market for companies to raise the money to buy them?
phyalow 15y ago
No Major Corporations, or capital raising/lending.
- Roboprog 15y ago
  You say that like it's a bad thing :-) OK, the second is probably a bad thing. "Major corporation" seems to leave a bad taste in my mouth, though. Probably because monopolistic companies are run like Soviet Politburos with idiotic wasteful top-down planning -- "corporate communism".
lionhearted 15y ago
> (As in, consider their whole existence. What might the world have been like without investment banking?) It's a seen-and-unseen problem. Wages rising for the same activity is actually rare and historically really weird. The chief way people improve in the world is to automate/creative destruction old professions in favor of more modern ones, and through lower costs due to efficiency. Investment banking enables and accelerates both of those processes. It's a stretch, but not insane to think that, say, streaming video or iPads might not exist without investment banking. Someone replies, who cares about iPads or streaming video? But how much have, say, TED talks enabled thinkers to make progress on hard important problems? The causal chains here are long and complex, it's hard to say for sure. But creative destruction and replacement of old industries with new means better professions, and reducing costs is the other chief way to prosperity. You know about the huge blowups because they're noteworthy, you don't consider what industries wouldn't exist without a gradual re-allocating and efficiency, freeing up more people to do higher level work and driving costs down. It's hard to do mentally, inevitably someone will reply, "LOL, this guy thinks without investment banking there'd be no iPad!! That's all Jobs and Woz dude!!" I don't know. Maybe. But why is South Korea so much nicer to live in than South Vietnam? Why did South Vietnam start to improve rapidly when they liberalized the banking system and started taking foreign investment? Capital allocation really pulls the world forwards, but many of the gains are subtle and hidden while the failures are prominently on display.
- palish 15y ago
  C'mon. You've been on Hacker News three years. We're not like the rest of the internet. Let's try this again. Pretend you're trying to convince Feynman that investment banking is a Good Thing. What specific points would you raise? (No one would disagree that iPads / streaming video are good. We would, however, disagree on how much "investment banking" has contributed to their existence.)
  - arethuza 15y ago
    In "A Colossal Failure of Common Sense", Patrick Robinson provides a pretty good example of a pretty useful thing that investment banks appear to do - providing liquidity in the market for distressed corporate bonds. He gives an example of some airline that announces it has financial troubles - immediately people holding the bonds they issue are pretty keen to sell, pretty much at any price. The bank have had very smart researchers who spot that the airline looks like it will be in trouble and then estimate how much the airline is really worth and then buy at below this price (based on their assets - planes). The people offloading the bonds are presumably pretty happy as they are worried they might be worthless and the bank is making some money off of the risk that their research might be wrong. Sounds like a pretty fair way of making money to me.
    - palish 15y ago
      So... How is humanity better off by investment banking? What I mean is, that airplane example consists entirely of gamblers. Are you saying "humanity is better because people can continue to fly with the airline"? Then why not use a different airline? So I'm struggling to see why the world wouldn't be better off letting the airline fail, as opposed to risking a bunch of other people's money.
      - arethuza 15y ago
        "How is humanity better off by investment banking?" Their clients think they provide an economically useful function - otherwise they wouldn't use them. Do businesses really need more justification to exist than that? Also: - The bank wasn't directly interacting with the airline, they were buying bonds from other organisations who were holding them - Lots of people risk other peoples money - fund managers, pension companies, VCs, hedge funds etc. - with varying degrees of risk and exposure by the people actually doing the investing.
yummyfajitas 15y ago
Whether or not you believe I-banking is a good or bad thing, it is utterly tangential to the main point I was making. The current crisis was caused because too many investment bankers were risk averse in the same way, not because they were risk taking.
rayiner 15y ago
Investment banking as an umbrella term is pretty useful. Investment bankers have historically been professionals advising companies on financial issues. If you're Ford and want to construct a new factory, you go to an investment bank which helps you issue corporate bonds to finance the new factory. A factory gets built, which creates jobs and products for the market, and Ford and investors split the surplus from that action, with the former making more revenue and the latter getting interest payment. Investment bankers also handle acquisitions, IPOs, and other generally useful corporate finance, generally non zero-sum transactions. In return, the bankers are paid a fee for their services. The problem is that these traditional investment bank functions only make up something like 12% of the revenues of a traditional investment bank like Goldman Sachs: http://www.wikinvest.com/stock/Goldman_Sachs_Group_(GS)#Investment_Banking_.2812.25_of_revenue_in_2010.29.07UNIQ63d1795f1375455-nowiki-00000027-QINU1.07UNIQ63d1795f1375455-nowiki-00000028-QINU http://www.wikinvest.com/stock/Goldman_Sachs_Group_(GS)#Inve... Most of the rest of the revenue comes from trading and other activities of questionable utility.

by palish 15y ago

The relevance is: "investment banking" may have done more harm than good. (As in, consider their whole existence. What might the world have been like without investment banking?)

RockyMcNuts 15y ago

do you think Google would exist, and they would have been able to raise money for a massive server farm, if initial investors didn't know they would be able to IPO it if it was successful? do you think the market for YC startups would be hot if there was no public stock market for companies to raise the money to buy them?

phyalow 15y ago

No Major Corporations, or capital raising/lending.

Roboprog 15y ago
You say that like it's a bad thing :-) OK, the second is probably a bad thing. "Major corporation" seems to leave a bad taste in my mouth, though. Probably because monopolistic companies are run like Soviet Politburos with idiotic wasteful top-down planning -- "corporate communism".

lionhearted 15y ago

> (As in, consider their whole existence. What might the world have been like without investment banking?) It's a seen-and-unseen problem. Wages rising for the same activity is actually rare and historically really weird. The chief way people improve in the world is to automate/creative destruction old professions in favor of more modern ones, and through lower costs due to efficiency. Investment banking enables and accelerates both of those processes. It's a stretch, but not insane to think that, say, streaming video or iPads might not exist without investment banking. Someone replies, who cares about iPads or streaming video? But how much have, say, TED talks enabled thinkers to make progress on hard important problems? The causal chains here are long and complex, it's hard to say for sure. But creative destruction and replacement of old industries with new means better professions, and reducing costs is the other chief way to prosperity. You know about the huge blowups because they're noteworthy, you don't consider what industries wouldn't exist without a gradual re-allocating and efficiency, freeing up more people to do higher level work and driving costs down. It's hard to do mentally, inevitably someone will reply, "LOL, this guy thinks without investment banking there'd be no iPad!! That's all Jobs and Woz dude!!" I don't know. Maybe. But why is South Korea so much nicer to live in than South Vietnam? Why did South Vietnam start to improve rapidly when they liberalized the banking system and started taking foreign investment? Capital allocation really pulls the world forwards, but many of the gains are subtle and hidden while the failures are prominently on display.

palish 15y ago
C'mon. You've been on Hacker News three years. We're not like the rest of the internet. Let's try this again. Pretend you're trying to convince Feynman that investment banking is a Good Thing. What specific points would you raise? (No one would disagree that iPads / streaming video are good. We would, however, disagree on how much "investment banking" has contributed to their existence.)
- arethuza 15y ago
  In "A Colossal Failure of Common Sense", Patrick Robinson provides a pretty good example of a pretty useful thing that investment banks appear to do - providing liquidity in the market for distressed corporate bonds. He gives an example of some airline that announces it has financial troubles - immediately people holding the bonds they issue are pretty keen to sell, pretty much at any price. The bank have had very smart researchers who spot that the airline looks like it will be in trouble and then estimate how much the airline is really worth and then buy at below this price (based on their assets - planes). The people offloading the bonds are presumably pretty happy as they are worried they might be worthless and the bank is making some money off of the risk that their research might be wrong. Sounds like a pretty fair way of making money to me.
  - palish 15y ago
    So... How is humanity better off by investment banking? What I mean is, that airplane example consists entirely of gamblers. Are you saying "humanity is better because people can continue to fly with the airline"? Then why not use a different airline? So I'm struggling to see why the world wouldn't be better off letting the airline fail, as opposed to risking a bunch of other people's money.
    - arethuza 15y ago
      "How is humanity better off by investment banking?" Their clients think they provide an economically useful function - otherwise they wouldn't use them. Do businesses really need more justification to exist than that? Also: - The bank wasn't directly interacting with the airline, they were buying bonds from other organisations who were holding them - Lots of people risk other peoples money - fund managers, pension companies, VCs, hedge funds etc. - with varying degrees of risk and exposure by the people actually doing the investing.

yummyfajitas 15y ago

Whether or not you believe I-banking is a good or bad thing, it is utterly tangential to the main point I was making. The current crisis was caused because too many investment bankers were risk averse in the same way, not because they were risk taking.

rayiner 15y ago

Investment banking as an umbrella term is pretty useful. Investment bankers have historically been professionals advising companies on financial issues. If you're Ford and want to construct a new factory, you go to an investment bank which helps you issue corporate bonds to finance the new factory. A factory gets built, which creates jobs and products for the market, and Ford and investors split the surplus from that action, with the former making more revenue and the latter getting interest payment. Investment bankers also handle acquisitions, IPOs, and other generally useful corporate finance, generally non zero-sum transactions. In return, the bankers are paid a fee for their services. The problem is that these traditional investment bank functions only make up something like 12% of the revenues of a traditional investment bank like Goldman Sachs: http://www.wikinvest.com/stock/Goldman_Sachs_Group_(GS)#Investment_Banking_.2812.25_of_revenue_in_2010.29.07UNIQ63d1795f1375455-nowiki-00000027-QINU1.07UNIQ63d1795f1375455-nowiki-00000028-QINU http://www.wikinvest.com/stock/Goldman_Sachs_Group_(GS)#Inve... Most of the rest of the revenue comes from trading and other activities of questionable utility.