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As Europe Watches Wall Street Fall, Schadenfreude Gives Way to Worry

most of all, the events of the weekend and Monday capped months of growing doubt about the so-called American model of investment banking.

"In Europe, there's a prevailing sense that the business model of the free-standing, highly leveraged investment bank that funds itself in the wholesale financial markets is virtually kaput," said Willem H. Buiter, a professor at the London School of Economics.

"The pure investment bank was an American specialty," he added. "But we've now seen three major American investment banks go down, so this model looks like a weakness, not a strength in a down market." [...]

"The average European has a view that Wall Street is an extremely powerful center, and thinks finance is a pejorative word," said Charles Wyplosz, director of the International Center for Monetary and Banking Studies in Geneva. "A number of people will use it to say the U.S. model of capitalism isn't working."

Within the world of banking itself, there have been longstanding differences between the European and American approaches.

While traditional "universal" banks like Deutsche Bank and UBS have long dominated the Continent, brash independent Wall Street investment banks like Lehman, Bear Stearns and Merrill Lynch muscled in on more profitable sectors like trading and underwriting in recent years, both in the United States and around the globe.

Over the last two decades, the European banks have made costly attempts to emulate the investment banking model. UBS bought Dillon Read and Paine Webber and Deutsche Bank acquired Bankers Trust.

With the disappearance of Bear and Lehman, and the absorption of Merrill into Bank of America, it appears that the European model has triumphed for the time being.

In the wake of the events this weekend, "I've heard people saying, `I told you so,' arguing the European universal model is better," Mr. Wyplosz said.

A Sense That Wall St.'s Boom Times Are Over

Borrowed money kept the lights on at investment banks like Lehman, because such pure investment banks do not have the consumer deposit base. [...]

Already, Wall Street firms are reducing their debt levels, and regulators are expected to create new rules about leverage, liquidity and capital levels. The rules, if strict, could force Goldman and Morgan Stanley [the two remaining major American investment banks] to merge with a bank that has customer deposits, a steady source of capital, and thus is buffered from collapse.



A bomb, H bomb, Minuteman / The names get more attractive / The decisions are made by NATO / The press call it British opinion -- The Three Johns
by Alexander on Tue Sep 16th, 2008 at 11:11:10 AM EST

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