How much of investment banks’ portfolios are tied up in the stock market?
Question/Comment: What are the connections between investment banks/houses and the stock market? How much of these investment banks’ portfolios are tied up in the stock market, and how much is in other places (like loans to businesses)?
Paul Solman: Investment banks were founded to funnel capital from those who had it to those who needed it. They were originally called “Merchant banks” because they financed merchant shipping goods from one place to another. Shylock was an investment banker of sorts; Antonio, the “merchant of Venice,” was his client.
Shylock, of course, simply loaned money. Later, investment bankers helped place loans with others, raised money for businesses by selling their stock, and generally functioned as financier and consultants.
But in recent decades, if you want to sound Shakespearean, you could say the investment banks returned to their merchant banking roots and began financing deals themselves. That is, they made most of their money as investors, not intermediaries. And when they were formally exempted by the SEC from capital requirements in 2004, they invested in wildly leveraged ways, borrowing $30 or more of OPM (other people’s money) for every buck of their own. (See the New York Times piece by Stephen Labaton, on October 2, 2008: Agency’s ’04 Rule Let Banks Pile Up New Debt)
So that’s the long preamble to your actual question (which I just had to reread to remember; I tend to go off on my own, as you may have noticed). Here is the answer, extrapolating from Morgan Stanley’s balance sheet of one year ago: less than 10 percent of their assets were in stocks. The rest was debt and fancy derivative side bets.