Big Think spoke with Robert Kaplan, former vice-chairman of Goldman Sachs and current professor at Harvard Business School, about regulating hedge funds, the issue of bonuses, and why he’s happy with the Geithner Plan.
BT: How is the landscape shifting relative to boutique investment banks, are we seeing the foundations of new behemoths?
RK: Big firms, like Goldman Sachs and Morgan Stanley, are very well positioned for business to come back when it does. They and others have a natural advantage in that they have expertise in multiple areas and can offer broad advice. There is room for small boutiques, of course, and right now those firms are attracting a lot of talent.
BT: Won’t the new compensation structures at big banks benefit the boutiques?
RK: The compensation disadvantage at big banks will likely be short-term (i.e. the Tarp money will eventually be repaid and the disadvantage will be substantially alleviated).
BT: So the old compensation structures should be re-implemented eventually?
RK: No. On the one hand, incentives are good—–but those incentives should vest over many years so that there is less motivation to make risky short-term bets. Smaller salary plus a bonus is fine, but bonuses should be awarded (and vested) based on good long-term decisions. That means less cash, more stock, and more vesting.
BT: What’s the future look like for the big broker dealers?
RK: I’ll discuss Goldman and Morgan Stanley together. They’re well positioned. Their balance sheets are very up-to-date in terms of marks. We know the trading businesses are very solid right now. Investment banking will come back as there is a pent up need for robust merger activity as well as corporate capital raising. Also, the investment management business will thrive with the aging population, growth in savings rates as well as return to global growth in financial assets.
Of course, a revival in investment banking will significantly help JP Morgan and the other big bank/broker dealers.
BT: How can big banks/investment banks best position themselves?
RK: It will be critical to have a strong global footprint. In particular, having a strong presence in the emerging markets will be especially important. In addition, firms that can lend, like JP Morgan, will have an advantage because of their ability to provide commercial banking services to their corporate clients. As always, the ability to attract, retain and develop strong people will be critical.
Lastly, strong leadership will be critical. The ability to develop strategy, articulate a vision, set priorities, build a cohesive culture, manage risk and serve clients are key skills that will still separate good firms from great ones.
BT: In addition to discussion of domestic stimulus efforts, what else do you expect from the G-20?
RK: Protectionism is a big issue and that will be a huge tension. The G-20 needs to pledge that they will manage this tension and fight pressures that could lead to protectionism.
Regarding financial regulation, they realize that this effort needs to be globally coordinated. Leaders from around the world have been working on this behind the scenes for the past several months. Controlling systemic risk (e.g. how much leverage banks and broker dealers should have as well as overall regulation of derivatives etc.) has to be coordinated globally.
BT: Is it a good idea to regulate hedge funds?
RK: The SEC must be able to say which funds are overleveraged and pose systemic risk. And they need to understand each firm as well as exposures, system-wide.
BT: Are Geithner and Summers unduly focused on Wall Street?
RK: No—I don’t see that at all. They are working on a number of fronts to restore our economy. They understand that we need a strong financial system as a basis for a strong economy. In addition, they also are working aggressively to help households and reenergize the middle class in the United States. In addition, they are pushing for investments in infrastructure, health care and alternative energy that will likely give us a better basis for sustainable growth.