Investment Banks are the Same Everywhere

link here to article

This article is primarily a profile of the CEO of Germany's, and Europe's largest and most powerful bank. There are several points that are worth mentioning, however. The banks oppose restructuring the debt of peripheral countries in the euro zone because it would force them to write down their loses. Instead they favor the imposition of austerity measures that are preventing these countries from recovering from recession.

The major banks are also arguing against the imposition of larger capital requirements. They claim, over the objection of many economists, that higher capital requirements would reduce their ability to make loans to Main Street businesses. This ignores the fact that 85% of Deutsche Bank's profits come from its investment bank, located in London, which is heavily engaged in trading operations.

What struck me most about the article was the photo of the CEO in front of his shareholders promising them a 25% return on equity. Banks can only achieve that kind of return on equity by using leverage to boost returns. That, of course, is the kind of risk that led to our financial crisis. It is a risk, however, that would be backed by governments which recognize that they are "too big to fail". In other words, the asymmetric incentive system that envelopes our current version of corporate capitalism, has not changed. CEO's have an incentive to increase stock prices which provides them with the bulk of their compensation. They have to take risks with other people's money do accomplish this, but shareholders applaud their actions. This is what happens when corporate goals are singularly directed toward the objective of increasing short term shareholder value. The idea that other stakeholders such as employees, customers, suppliers, longer term shareholders, and the broader community have a stake in our corporations was blown away in the 1980's.