Are Commercial Banks the New Kings of Finance?
As the WSJ reported yesterday, the collapse of Lehman Brothers (LEH) and the sale of Merrill Lynch (MER) to Bank of America (BAC) is just the latest chapter in a stunning redesign of the financial world. Stand-alone investment banks are dying rapid deaths, with three down in 2008 already (who can forget the spectacular demise of Bear Stearns (BSC)?). In their place, a new king is rising – commercial banks. The key difference between an investment bank and a commercial bank is the source of their cash flow. A commercial bank like Bank of America or Wachovia (WB) takes consumer deposits, which are insured by the federal government to prevent depositors from pulling out all at once (a major catalyst of the Great Depression in the 1930s that is now prevented by tighter regulation and insurance). Investment banks take no such deposits, and as a result benefit from lighter government oversight that allows them to take big risks to earn huge profits. To finance their short term operations, ra
