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The Remaking of Wall Street

68 Pages Posted: 19 Jul 2017  

Andrew F. Tuch

Washington University in Saint Louis - School of Law

Date Written: July 12, 2017

Abstract

This Article critically examines the transformation of the financial services industry during and since the Financial Crisis of 2007–2009. This transformation has been marked by the demise of the major investment banks and the related rise of a set of powerful players known as private equity firms. First, this Article argues that private equity firms now mirror investment banks in their mix of activities; ethos of entrepreneurialism, innovation, and risk-taking; role as “shadow banks”; and overall power and influence.

These similarities might suggest that private equity firms pose financial risks similar to those caused by their now-defunct predecessors. But this Article suggests that private equity firms, as currently structured, are more financially stable and pose less systemic risk to the global economy. These firms are structured and funded in ways that may address the basic shortcoming that led to investment banks’ downfall – specifically, the use of short-term debt to fund longer-duration assets. It thus argues that, in the face of onerous post-Crisis reforms, Wall Street has evolved to displace investment banks with more financially resilient institutions. Importantly, however, the Article cautions that ongoing changes in private equity firms’ broker-dealer activities raise systemic concerns that require active regulatory monitoring. The Article also identifies systemic and financial stability concerns arising from the funds that these firms manage, particularly their hedge and credit funds, about which little detailed information is publicly available.

Finally, the Article explores other implications of these developments, including for the effectiveness of post-Crisis regulation, the popular backlash against Wall Street, the incidence of misconduct, and the evolution of financial institutions.

Keywords: Private Equity, Investment Banking, Systemic Risk, Financial Crisis, Financial Stability, Asset Management

JEL Classification: G01, G21, G23, G24, G33, K10, K20, K22, L22, N20, N22

Suggested Citation

Tuch, Andrew F., The Remaking of Wall Street (July 12, 2017). Harvard Business Law Review, Forthcoming; Washington University in St. Louis Legal Studies Research Paper No. 17-07-01. Available at SSRN: https://ssrn.com/abstract=3002822

Andrew F. Tuch (Contact Author)

Washington University in Saint Louis - School of Law ( email )

Campus Box 1120
Saint Louis, MO 63130
United States

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