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Value Creation Blog

4 Reasons Investment Banks Should Still Be Partnerships - Wealth Management

Posted by Josh Patrick

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We all know about the role that Wall Street Banks played in the financial meltdown that has plagued our society over the past several years.  Many people don’t know that many of the Investment Banks that were at the center of our financial disaster used to be partnerships and not publically traded corporations.

You may ask, what’s the big deal and why should I care?  There are many reasons.  Here are some I think that are important:

There is no personal liability in Pubic Corporations.   

When Investment Banks used to be partnerships the partners (executives) of theses banks were personally responsible for the debts and or failures of their companies.  If their company went bankrupt, they would be personally accountable and have a significant portion of their personal net worth disappear.

Literally all of the investment banks that used to be partnerships have now become corporations.  As a result the executives of these companies can make bets as risky as they want and not be personally responsible for the results.

Corporations with no personal liability will make riskier bets. 

Now that our investment banking community has all become public corporations we’ve privatized profits and made public losses.  The concept of too big to fail not only has taken personal responsibility out of the investment banking community, but has transferred the risk to the public.

It’s not about building value; it’s about how big a bonus can I get? 

When investment banks were partnerships and for many, the majority of their net worth was tied up in their partnership account, real profits meant something.  If their organizations had big losses, it came out of the executive’s personal net worth.  Now they just work for outsized bonuses and let their shareholders take the brunt of bad decisions they might make.

Share value has a lot to do with executives net worth. 

Instead of partners capital accounts we now have quarterly earnings reports that might be manipulated with trumped up earnings from exotic trading instruments.  We’ve moved from a world of real partnership capital to one of generally accepted accounting principles and sexiness that drives stock prices.  This allows investment bank executives to bamboozle the markets with profits that looked real one day and disappeared the next.

The people who are the losers under this scenario are those of us who live on Main Street.  The unfortunate thing is the executives of our Nation’s investment banks like it the way it is.  The get rich while we take the risk they used to take.  Personally when the decks are stacked against us, I feel cheated.  What are your feelings?

Josh Patrick

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Topics: wealth management

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