A good friend from Wall Street sent me some interesting comments on how the U.S. financial sector is evolving in light of the events associated with the blow ups in the financial sector over the past year. I was interested in what he had to say because it seems to me that financial reforms could have a significant impact on the creative destruction process in the months ahead.
When the proposed financial reforms are implemented over the next 6 to 12 months, the world’s large investment banks are likely to be very different creatures from what they were in the last quarter century. Specifically, in coming months, we should expect to see:
- Investment banks raising another $500 billion in equity capital on top of the $250 billion-plus they have already raised during the previous six months.
- A move to transfer $5 trillion off-balance-sheet assets on their balance sheets.
- More stringent in-house risk management.
- Liquidity management under central bank regulation.
The upshot of these reforms is to, in some respects, make investment banks more like commercial banks. There are, in fact, widespread expectations in the marketplace today that investment banks may even become commercial banks or be merged with commercial banks.
One wonders if investment banks, as they morph into things that resemble more closely commercial banks, will be more reluctant to finance innovative companies? Commercial banks have a history of being stodgy and not exactly friendly to financing emerging technology companies. I remember having a conversation with Michael Milken at a Harvard School of Business conference on this topic back in 1989. He said that in the early 1980s he had all these great entrepreneurs coming to see him at 4:30 in the morning to try to get capital to start their emerging tech ventures. Commercial bankers just weren’t interested. He was delighted to meet with them and ended up financing quite a few blockbuster deals that went on to reshape the tech landscape and U.S. economy.
One also wonders if more stringent in-house risk management will bog down the IPO process even further in the future? I can easily envision a rising share of emerging technology companies being forced to remain private longer than they would typically desire due to tighter risk management procedures. In this environment, it wouldn’t surprise me to see more companies seeking alternative sources of capital off shore.
If readers have any comments or insights on this topic, please feel free to share them with us in the comment section below.
