Chapter 10The Alchemists of Finance Exercises1. Questions on the text1)What ’s the main difference between commercial banks and investment banksIn today's business environment, the main business of commercial banks is to collect deposits and make loans, while that of investment banks is to underwrite stocks and bonds and advise companies on mergers and acquisitions.2)Why do investment banks try to keep quiet about their big profitsInvestment banks try to keep quiet about their big profits for two major reasons: first, they are under more scrutiny by regulators and investors; second, private equity and hedge funds have overtaken them in raising money and making excessive bets.3)What changes have taken place in the financial markets since the 1980sThe main changes since 1980s have been the rapid growth of financial instruments with unprecedented breadth, depth and richness, brought out by technology and innovation. Examples of those financial instruments are public and private debt securities and derivatives.4)Why do bankers and regulators worry about a possible collapse of an investment bankThey worry about a possible collapse of an investment bank because such an event will have serious implications for the whole financial system, and it is vital to know how such institutions evolve, how they handle risks and how well those risks are spread around the financial system.5)Which three factors can explain the huge profit for investment banksThose factors are: first, the alchemist's trick of turning debt (mostly leaden) into derivatives (mostly liquid); second, the emergence of a new class of leveraged client (hedge funds and private equity); third, seeking out new capital markets and clients around the world....
