A VC - Latest Comments in Trying To Make Sense of The Brokerage Bust

Re: Trying To Make Sense of The Brokerage Bust

slowblogger — Wed, 24 Sep 2008 09:01:50 -0000

Good post. One industry I want to see being innovated, which means the current model should be destroyed, is investment banking. The retail brokerage has changed and the human brokers lost.

But there are still corporate investment banking business that has not changed yet. I think there were some attempts before the Internet bubble, but they failed. But now seems the time for another round of attack. Anyone working on IB 2.0?

Re: Trying To Make Sense of The Brokerage Bust

zachlandes — Tue, 23 Sep 2008 22:48:53 -0000

Very interesting post, Fred. I agree with you re: investment banks. What I would be interested to know is how the shake up is affecting M&A firms. Has technology changed the game there as well?

Re: Trying To Make Sense of The Brokerage Bust

fredwilson — Sat, 20 Sep 2008 14:20:12 -0000

³it's never a good idea to comment while offended²

Never a truer word spoken curmudgeonly

I am going to print that out and put it right above my computer in my home
office!

Re: Trying To Make Sense of The Brokerage Bust

PV — Fri, 19 Sep 2008 22:11:02 -0000

I think people are going to be very startled when the NegAM ARMs start defaulting in early 2009. If you think Subprime mortgages were a mess, you haven't seen anything yet.

I just don't think continually printing money is the answer, and this new RTF, basically a CDO^3 is just a band-aid on a gun-shot wound. I'm pretty freaked out over the whole thing.

I have the feeling the government is really doing this bail-out to keep the CDS market underwraps (how can you even fathom 72 trillion dollars!). I think a new federal clearing house as one poster commented above is really probably the best option. Yikes in general.

Re: Trying To Make Sense of The Brokerage Bust

curmudgeonly troll — Fri, 19 Sep 2008 11:01:21 -0000

well, it's never a good idea to comment while offended LOL.

there's a type of free market fetishist that thinks the market is always right... if the price of oil is too high it's because the guvmint is interfering with oil companies' right to pollute air and spoil land... I guess they must also think Webvan would have been the next Wal-Mart if not for guvmint intervention, since the market couldn't possibly misprice anything...

they're just as out of touch with reality as redistributionists and might as well start getting used to being treated like cranks.

financial markets have been in disarray for a year, half the financial industry is going out of business and Paulson and Bernanke are taking over the other half... and apparently markets are never wrong and we need to eliminate the capital gains tax... all you can do is laugh LOL

Re: Trying To Make Sense of The Brokerage Bust

Engago team — Fri, 19 Sep 2008 07:43:37 -0000

After the Credit Crunch the TechCrunch?
Start-ups and grownup companies will not get money from VC's or bankers, but need to have paying customers.

Still the trend is clear: The Internet will be the place to trade.
Compare the costs of a transaction in a financial institution:
- Face to face at the counter: $10 to $15
- ATM: $1
- Online: $.10 to $.15
Companies will need to generate leads online and nurture their prospects and customers online.
The digital divide will only become bigger.

Re: Trying To Make Sense of The Brokerage Bust

stone — Fri, 19 Sep 2008 06:31:20 -0000

Wall Street has been disgraced again. This time I hope American's don't let them off the hook for being the greediest and most unethical among us. Anyone that knows the truth about Wall Street needs to stand up this time and resist a bailout that allows a person on Wall Street to make hundreds of millions for pushing other people's money around.

Now that Wall Street barely exists and many of the firms have been wiped out it's time for the congress to get tough and finally put the screws to these creeps. I'm sick and tired of my tax dollars going to bail out such a repulsive industry.

Re: Trying To Make Sense of The Brokerage Bust

gravedigger — Fri, 19 Sep 2008 06:21:46 -0000

Ever-increasing parasitism is called "technology driven darwinism." The deluded people on this thread really believe that what happens at the casino on Wall Street is about talent and creativity. I guess some would say that there is an art to stealing the lives and labors of people here and around the world. And to add insult to injury, let those same people pay to bail you out so you can do it all over again.

Re: Trying To Make Sense of The Brokerage Bust

Jason — Fri, 19 Sep 2008 05:57:39 -0000

Hedge funds redefine the investment practise?

Re: Trying To Make Sense of The Brokerage Bust

mpstaton — Fri, 19 Sep 2008 01:06:35 -0000

this is the best post by far. thank you for being insightful and not, um, indoctrinated.

Re: Trying To Make Sense of The Brokerage Bust

John — Fri, 19 Sep 2008 00:29:28 -0000

Just checked the market cap of Foot Locker. At $2.6B it seems like it's more valuable than some of the 'sexier' companies out there!

Re: Trying To Make Sense of The Brokerage Bust

kip — Thu, 18 Sep 2008 22:27:30 -0000

Great post. This is LTCM 2.0. When genius failed showed what would happen back in the late 90's. The policies of Hank and co. are so scarily protectionist. I'm afraid of what kind of mess they are going to leave. Any attempts to change policy now is only going to add an accelerator to the fire.

Re: Trying To Make Sense of The Brokerage Bust

Jonathan — Thu, 18 Sep 2008 22:15:29 -0000

The comments from MassMan are excellent However I don't agree with the idea that consolidating brokerages into commercial banks will make matters worse. The stability of funding that comes from a commercial bank is very important. Over-reliance of wholesale funding killed Drexel, Bear, and Lehman. The current crisis (which differs from the one in Summer 07) is a result of the de-leveraging happening too fast, itself a result of the difficulty of the broker/dealers have in getting liquidity. The Fed has tried to help with the PDCF (basically a discount window for broker/dealers) but the stigma attached prevents anyone from using it (outstandings as reported on the Fed H.4.1 have been zero. Not even Bear or Lehman used it when they could).

Broker/dealer funding is pretty simple. Securities Lenders, who act as custodians for big funds, lend out, as agent, bonds to dealers who are short, taking in cash as collateral. They take the cash and lend it to dealers in exchange for a lien on the dealers long positions. When the Sec Lenders' custody clients don't like taking risk to the broker dealers, they tell the Sec Lenders to stop lending the paper out, which means they (Sec Lenders) don't have the cash to recycle, Dealers have a really hard time covering short positions and funding themselves. That constrains the amount of credit to the hedge funds, among others. Commercial banks at least have a stable funding base to cover the cash needs. This is why, I think, the independent broker/dealer model is dead.

Re: Trying To Make Sense of The Brokerage Bust

Ethan Bauley — Thu, 18 Sep 2008 21:00:06 -0000

Killer comment

Fred, for the non-NYC crowd, will you keep an eye on any new companies/ideas that come out of this and keep us posted? Who else will be covering this? Roger @ Info Arbitrage?

In a way, itall kind of makes me wish I had stayed in finance...there are hundreds of new businesses that can [will] spawn, I wish I had the insight to do something with it ;-)

Re: Trying To Make Sense of The Brokerage Bust

fredwilson — Thu, 18 Sep 2008 18:37:10 -0000

This makes a lot of sense to me. This post was called ³trying to make sense
of the brokerage bust² and you've contributed to that. Thanks.

Re: Trying To Make Sense of The Brokerage Bust

tetsuotrees — Thu, 18 Sep 2008 18:25:26 -0000

Fantastic post.

Re: Trying To Make Sense of The Brokerage Bust

MassMan — Thu, 18 Sep 2008 18:24:39 -0000

A few comments:

The problem we are facing is fourfold:

- Solvency: Despite a growing economy (if you believe the government statistics), people and institutions cannot service their debt. It started with the lowest quality loans (aka the conjoined twins of sub-prime loans securitized into CDOs) but has quickly spread to other higher grade classes of debt. Solvency obviously plays a huge roll in asset bubbles. Once that disappears the bubble collapses upon itself.

- Confidence: Nobody knows who has what or who is dependent whom to make good on their respective obligations. Once you lose confidence in your counter-parties, the system breaks down. Trades don't clear and any level. Why risk your career (or what's left of a career) for a few hundred extra basis points? Ask the former traders on the Bear repo desk.

- Transparency (or lack there of): The various financial products have become so complex and so opaque that they have become impossible to value, even in the best of times. The firms themselves are impossible to value because their financial documents don't mean anything (or they mean whatever the firms want them to mean).

- Complexity: The system has become hyper-complex. Nobody really understands what's going on or what might happen if certain policies are implemented. We are flying by the seat of our collective pants.

Should we care? You bet. Unlike the 70s, 80s or even the 90s, what happens on Wall St. matters...a lot. Compare the collapse of Drexel to Bear Sterns. When Drexel failed it was news but business went on as usual. When the Bear started to collapse the system buckled. In essence, we've built a financial system with numerous single points of failure in it. Never a good idea (ask any engineer) but that's what we have and that's what we have to deal with.

Consolidating brokerages into large commercial banks will only make things worse. There will be less transparency and the institutions will only get more and more complex. It's the opposite of what you really want to happen. In fact, removing Glass-Steagall was a huge mistake.

Depending on Hedge Funds is also a another mistake. They are levered players that actually depend on the investment banks for loans to lever up their trades. Worse yet, they operate in world with almost no regulation and very little transparency.

What we really need is a return to sound financial regulation. Markets need a central clearing exchange that are completely open where all the participants are subject to intense scrutiny.

- The MassMan

Re: Trying To Make Sense of The Brokerage Bust

Dorian Benkoil — Thu, 18 Sep 2008 16:32:06 -0000

I'm reminded of the Eddie Murphy, Dan Ackroyd movie (Trading Places?) when Murphy, down-and-out guy, gets wind of how it works for Wall Street brokers and traders, and has an epiphany: You guys are just like bookies, collecting money off both ends! he exclaims.

And, as you point out, here, Fred, technology is obviating the need for that kind of middleman.

Re: Trying To Make Sense of The Brokerage Bust

gregorylent — Thu, 18 Sep 2008 16:12:41 -0000

yes, it really worked with chrysler, the whole industry progressed ... not. aren't they asking for more billions lately? in some countries the leaders express shame publicly. wish we were one of them.

Re: Trying To Make Sense of The Brokerage Bust

fredwilson — Thu, 18 Sep 2008 15:56:50 -0000

why do you have to call someone a retard? some of your points are really good but you ruin it for me in that first line

Re: Trying To Make Sense of The Brokerage Bust

Brian — Thu, 18 Sep 2008 15:55:47 -0000

A democrat.

Possibly in the New Democrat (Bill) Clinton mold. For some reason that has gone out of style. I have no idea why.

Re: Trying To Make Sense of The Brokerage Bust

Don Jones — Thu, 18 Sep 2008 15:20:25 -0000

And now there's news about a possible RTC - gee, we're all paying for the excesses of the "banks", while their management got great bonuses during the big boom. Hope they're happy with all that money.

Re: Trying To Make Sense of The Brokerage Bust

matt oesterle — Thu, 18 Sep 2008 14:42:47 -0000

excellent post. my favorite so far on this topic.

i'd be interested to learn more about your thoughts on something you hint at: "that's why we need to be careful with all of this bailout activity." some might go way out in left (well, technically right) field and suggest that bailouts, no matter how necessary they seem, are always creating long-term inefficiencies. the same people that might argue to get rid of the fed and government intervention in the financial markets entirely. i'm somewhat sympathetic to this angle, at least from an academic standpoint.

however, when it comes to reality, few people wanted to see fannie mae / freddie mac go under. and in a similarly extreme example, the LTCM fiasco back in the day. at the expense of being too general, where would you personally draw the line, if one can be drawn?

thanks fred

Re: Trying To Make Sense of The Brokerage Bust

howardlindzon — Thu, 18 Sep 2008 14:33:15 -0000

good stuff on this comment

Re: Trying To Make Sense of The Brokerage Bust

Druce — Thu, 18 Sep 2008 14:02:54 -0000

The problem is

- the banks are levered 30:1, a 4% loss wipes them out
- their financial statements are incomprehensible
- management claims of liquidity/profitability are not credible

the country has been consuming more than it produces for a long time simply because it can print dollars and the rest of the world inexplicably still wants them. once everybody gets wise there will be hell to pay. if we were a Latin American country it would have happened a long time ago and people like Paulson, Rubin and Summers would have been leading the charge for 'market-based readjustment'.