Nouriel Roubini asks an excellent question, and it deserves some thought. We include only a brief excerpt, cutting to the chase as it were. The entire piece can be read here.
For the short term the investment banks can live off the public dole, scamming lunch money by short term manipulation of the markets, and copping the odd fee or so from corporations that have not fallen by the wayside.
In the longer term there will be far fewer money center banks, more small and regional banks, and more a return to banking regulations.
Certain parts of the economy are going to be dead money for a long time. The pit traders are going to get a lot of practice making paper airplanes.
The hope will be that the corporate sector will build up its cash reserves, start capex spending to regenerate the real economy, and of course buy up competitors generating goodies for Wall Street.
There will be an effort to find fresh countries to despoil overseas.
The US financial system is a teetering wreck, and a significant amount of liquidation and consolidation lies ahead of us. The problem with bankers in key roles like the Fed is that they NEVER like to see a bank fail, so they keep propping up losers far beyond their natural life, wasting dear resources for the real job ahead, infecting society with the stench of rotting Ponzi schemes.
How will financial institutions make money now that the securitization food chain is broken?
Nouriel Roubini
May 19, 2008
The most severe financial crisis in decades has not only damaged the balance sheet of financial institutions. It has also severely affected their P&L, i.e. the process of generating revenues and profits. ....
So how will mortgage brokers, banks, broker dealers, monoline insurers, rating agencies generate revenues and profits now that this slice & dice scheme has unraveled? The current market delusion that the worst is behind us for financial institutions is based on the view that most of the writedowns of the toxic assets have already been done.
But this is not just a balance sheet problem. Now financial institutions have a more severe P&L problem, i.e. how to generate income and earnings from now on when they cannot originate junk any more. The entire income generating model of financial institutions – make income out of securitization fees rather than by holding the credit risk - is broken now that the generalized credit bubble (not just subprime mortgages) has burst; thus, how will these financial institutions generate earnings over time?
Capital losses are one-time problems; but destruction of the income generation process is a more severe and persistent problem that will require banks and other financial institutions to rethink their overall business model of credit risk transfer. But there is no clear and sound new business model for them: going back to the old days of “originate and hold” is not fully possible while the new “originate and distribute” model has shown all of its wrong and distorted incentives, risks and systemic failures.
So banks and other financial institutions will have to seriously rethink their business model and how they are going to make money: the model of slice and dice and pile fees upon fees and transfer the credit risk is broken. It is not clear if banks and other financial institutions have a better model. May they will have to go back to old fashioned banking: carefully assess the creditworthiness of their borrowers, lend on sensible terms and hold a good part of the credit risk now that the easy fee/profit generating machine of securitization is terminally broken.
