PARTICIPANTS

Philippe Barret, George Shultz, John Taylor, John Cogan, Gary Becker, John Gunn, John Shoven, Michael Boskin, John Ciorciari, and Matt Gunn.

KEY ISSUES DISCUSSED

  • Background on Investment Banking – Philippe Barret gave a wide-ranging presentation on the investment banking industry, focusing on recent developments and relevant policy issues. He stressed that unlike commercial banks, which get much of their funding from deposits, investment banks rely on short-term wholesale borrowing, which makes their business model less durable. As support for that argument, he noted that the Bear Stearns crisis began when repo counterparties refused to accept its assets as collateral. The group discussed the Fed’s recent intervention and how the Fed’s role with respect to investment banks differs from its role as the lender of last resort to commercial banks.

  • Risks in the Investment Banking Industry - In recent years, investment banks’ increasing reliance on proprietary trading for income, their rising dependency on risky “Level 3” assets for yield, and higher leverage ratios made them vulnerable to tightening credit. New products and markets also carry risks, and Barret used the booming CDS market as an example. He argued that all five major investment banks appeared to face broadly comparable risks before the Bear Stearns crisis, making it hard to predict how the subprime crisis would affect them differentially. Some analysts believed that Lehman Brothers, Goldman Sachs and others would fall like “dominoes” without the Fed’s intervention.

  • Regulatory Issues – Barret described the SEC’s program to monitor the five largest investment banks as consolidated supervised entities but noted that the SEC does not publish firms’ capital ratios and liquidity data, making it difficult for investors to assess the firms’ positions or overall systemic risk in the market. He also touched on the uncertainty in markets about the Fed’s future role in the financial sector.

  • Policy Options – Barret concluded by offering policy recommendations. He argued that the Fed’s recent intervention meant it would need to establish covenants with the major investment banks on capital adequacy and liquidity. Regulators also need to insist on better disclosure and mechanisms for coping with business failure. He discussed some of the challenges of effective regulation and contended that markets would solve most of the problems, as firms will deleverage, phase out complex structured products that cannot be analyzed, rely less on rating agencies, and be more cautious about counterparty risk. Interestingly, the least regulated players (hedge funds) have thus far been least damaged by recent turmoil.

  • The group concluded by identifying useful areas for further research, focusing on the relationship between financial market developments (such as the growth of structured products and CDS markets) and the real economy.

Upcoming Events

Thursday, October 16, 2025
Ideas Uncorked_Strauss.jpg
Ideas Uncorked: Jews Vs. Rome Book Launch
The Hoover Institution in DC hosts Ideas Uncorked: Jews Vs. Rome Book Launch on Thursday, October 16, 2025 from 5:00–6:30 pm ET. The event will… Hoover Institution in DC
Monday, October 20, 2025
sowell square_600px.jpg
The Sowell Legacy: Ideas, Impact, And Intellectual Freedom
Celebrating a lifetime of fearless inquiry, principled scholarship, and contributions that have shaped generations of thinkers and policymakers. Hoover Institution, Stanford University
Monday, October 20, 2025
Contested Taiwan:  Sovereignty, Social Movements, and Party Formations
Contested Taiwan: Sovereignty, Social Movements, and Party Formations
On behalf of the Project on Taiwan in the Indo-Pacific Region, the Hoover Institution would like to invite you to Contested Taiwan: Sovereignty,… Herbert Hoover Memorial Building, Room 160
overlay image