By Steve Coll article Posted June 05, 2018 06:19:08When Walled Street is worth $20 billion, you’d think that the investment banking world would be all about taking the big bets and putting them on Wall Street.
You’d be wrong.
In the early days of Wall Street, the firm was primarily known for its role in providing investment advice and managing portfolios of mutual funds, hedge funds and private equity funds.
That was the primary role of the firm’s top executives, which also included Robert Iger, CEO of Disney, and Jeffrey Immelt, former chairman of General Electric.
It was a world where top investment bankers would make decisions that were often made by the people they were supposed to be advising, and where top hedge fund managers would make those decisions based on their own personal financial experience and personal relationships with their clients.
But the Wall Street world was a far cry from the one that was created by the Federal Reserve and the Federal Deposit Insurance Corporation, and those two institutions created an environment in which top investment bank executives could be the ones making decisions about the very financial products that were the firm, and not by their own decisions.
“There was a huge emphasis on making sure that the best people would make the best decisions, and it was a very narrow, very, very narrow group of people that could do that,” says Andrew Liveris, the former CEO of IBM, and now a professor at the University of California, Berkeley.
Liveris remembers being told by a former top investment banker, who was later a partner at Goldman Sachs, that he should make the firm the bank’s “single most important asset.”
That was during the era when banks had been buying mortgage-backed securities.
In those days, the term “investment bank” was often used to describe those kinds of banks, and Liveris recalls being told that he had to “do what I could to keep Wall Street out of it.”
“I was told, ‘You’ve got to have your own portfolio,'” he recalls.
“I think it was the most aggressive, the most ambitious thing that we had ever done in terms of putting the interests of our customers above our own.”
Liversis and other former top Wall Street investment bankers say the investment bank’s emphasis on diversification meant that it was focused on managing a wide range of portfolios, from commodities to bonds to mutual funds to corporate bonds.
But the firm also had to balance the need to get better returns with the need for high quality, high return investment products that it could sell to the public.
“I remember being told, you’ve got a portfolio of stocks, bonds, bonds and commodities.
You have to make sure that those things are not too risky,” Liveris says.
It was a challenging balancing act, Liveris and others say.
In a world in which the biggest financial institutions were largely owned by large banks, the company had to decide whether or not it was going to be more aggressive or more conservative, and how aggressively to do it.
The result was a complex system that was not only based on the belief that it had to be both, Liveries says.
The company’s strategy changed during the early 2000s, when a group of investors, including JPMorgan Chase, began to buy up large chunks of the company’s assets.
In 2010, they bought back about a third of the $11 billion it had been holding, and the next year, they increased their purchases to about a fourth of the total.
But by the time Lehman Brothers collapsed in 2008, and Wall Street suffered another loss, the investment bankers’ confidence in the firm had eroded.
And as they tried to regain it, they began to see the firm as too risky.
For example, Liverias says, the first time he heard that Wall Street had become too risky was during his first day on the job at JPMorgan Chase.
“The CEO of JPMorgan Chase came in and said, ‘We are going to start investing in the stock market and we are going not to invest in bonds,'” he says.
“He said, if you are going out there and making a big bet, you’re going to lose money.
I remember thinking, I’ve never heard that before.
I thought, What?
That’s not right.”
Liveries says that when he heard the same thing at Citigroup, it was “just a different feeling.”
“The way that they talked about it was that we are a little bit like the junkies that have been running around in the financial system,” he says, referring to the people who were trying to get out of the system.
“We’re not really good.
We’re not smart.
We just don’t have the experience.
But if we do well, we can put a little money back in the system, and that’s what we’ve done.”
So the firm focused on diversifying its portfolio, Liverys says.
It did so by investing in commodities, bonds as well as