It is John Cryan, advisor at investment bank EA Markets, who makes the case for people in his own role, in an overview article published by Treasury & Risk. His focus is seemingly with US regulation and markets, yet its relevance could well spill over to other corners of global finance.
”Modernization Act” gave problems
He describes how today’s borrowers face a problem when they discuss loans with banks which may have split loyalties. A great part of the problem was founded in the 1990’s, with the US Financial Services Modernization Act (FSMA). It was intended to make the financial industry more competitive by removing legal barriers between commercial and investing banks.
”In the post-FSMA environment, the roles are no longer as straightforward because the investment banks are now also corporate lenders. Goldman Sachs and Morgan Stanley dominate as lenders and syndicators, first and foremost—along with Bank of America, JPMorgan, Citigroup, and Wells Fargo. However, all these institutions also command a sizable share of the global loan-arrangement business. The financial services industry consolidates power in these key institutions, and smaller banks have little incentive to try to compete with them on fees or terms because they depend on the universal banks to include them in loan groups,” writes John Cryan.
Loyal with whom?
”This dynamic creates inherent conflicts of interest, which are abundantly clear in what used to be the sleepy stock and trade of a commercial bank—loan making.”
He notes that loans for acquisitions are often arranged by a division of the same bank that is providing strategic deal advice through its M&A advisory group.
To counter such risks, John Cryan proposes an eight-point check list, starting with the tip to start the process early. ”The more you need the capital, the less negotiating power you have.”
After all, he perceives renewed interest in the role of the independent advisor, and does not see the industry’s old-day distinctions as counted out.