Investment bank as wealth transfer vehicle from shareholders to traders

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No matter how much traders make loss, their risk exposure is limited. For the worst case, they just get “fired”. No obligation to compensate for the loss. This position is so called ”owning put ” in a financial term, as their loss is floored but profit has no cap.

Therefore, it is reasonable for traders in an investment bank to leverage out the company’s capital to take more risks.

But, then who compensates their loss in this “zero sum game”? The answer is stakeholders of the investment banks.

If this business is lucrative, why they become public companies after a hundred years of their history? Not to continue to be partnership that allows partners to own their profits?

I think the reason is, the original investment banking businesses such as advisory on mergers, fund raise were indeed lucrative, so that it becomes extremely competitive. As a result, investment banks have become investing banks with high-risk exposure and it was a rational decision to let the companies go to be public to realize capital gain.

The hindsight is always fifty-fifty

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