Back in May, Berkshire Hathaway (NYSE: BRK-A ) co-chairman Charlie Munger remarked:
Banks that are 'too big to fail' shouldn't be allowed to be anything but boring. And that's how it used to be. Investment banking used to be a consulting business. It was extremely boring. The partners didn't make nearly the kind of money they do today. They were very conservative businesses.
There's no reason to have a system where every young man has $8 billion to play with and buy whatever he wants. It's incredibly stupid. It's absolutely crazy. If I were in charge, I'd take away everything from banks that wasn't boring.
Seems fair. Banks took on too much risk during the boom years, and it came back to bite 'em last fall. Naturally, we'd hope they'd move toward becoming stable, sustainable, conservative shops.
But don't tell that to Morgan Stanley (NYSE: MS ) . After dramatically scaling back its risk exposure after Lehman Brothers collapsed last fall, the bank's profits lagged those of Goldman Sachs (NYSE: GS ) and JPMorgan Chase (NYSE: JPM ) . Frustrated, Morgan Stanley's now hiring 400 people to reenergize its sales and trading operations.
While sales and trading can take on many different forms -- including some, like market making, that are virtually risk-free -- it is, on the whole, the segment that transformed old-school Wall Street banks into the explosive giants we now know them as. It turns Munger's old "consulting businesses" into incredibly large, too-big-to-fail hedge funds.
Trading in fixed-income securities became quite lucrative after Bear Stearns and Lehman blew up, since the reduced competition benefited the survivors. Banks' current rush to cash in on trading profits isn't surprising; it's capitalism at work. More importantly, if Morgan Stanley didn't jump back into the trading game while competitors prospered, shareholders would likely oust management in favor of someone who would.
But as my colleague Matt Koppenheffer warned last month, nothing has changed in banking. That bothers us, and it should bother you, too. No one can argue that the old Wall Street model isn't both dangerous and unsustainable. Yet the remaining survivors seem to be clinging to that model in an attempt to keep up with their neighbors.
In the summer of 2007, then-Citigroup (NYSE: C ) CEO Chuck Prince famously said, "As long as the music is playing, you've got to get up and dance. We're still dancing."
How'd that dance end up again?
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