Banks and Wall Street firms have been known to engage in practices that obscure the true nature and extent of their financial activities and risks. Here are some key points about how they handle "other people's money":
Banks hold trillions of dollars in off-balance sheet assets and liabilities that are not fully disclosed to the public. This includes complex financial instruments like derivatives, loan commitments, and special purpose vehicles. These hidden assets and risks were a major factor in the 2008 financial crisis.
Major banks like JPMorgan Chase, Bank of America, and Citigroup currently have trillions of dollars worth of assets and liabilities kept off their official balance sheets. For example, JPMorgan Chase alone has over $3.2 trillion in off-balance sheet exposures.
Banks use off-balance sheet vehicles to bypass capital requirements and leverage limits imposed by regulators. This allows them to take on more risk while appearing financially sound on paper.
The lack of transparency around these off-balance sheet activities makes it difficult for regulators, investors and the public to assess the true financial condition of banks. Critics argue this opaque accounting was a key enabler of the excessive risk-taking that led to the 2008 crisis.
Major banks have paid billions in fines for improper trading practices and other misconduct related to their opaque off-balance sheet operations. However, many argue that regulatory oversight and enforcement remains inadequate to rein in these risky practices.
In essence, banks exploit regulatory loopholes and accounting gimmicks to take excessive risks with depositors' funds and "other people's money" while obscuring these activities from public scrutiny. This lack of transparency benefits the banks but increases systemic risks to the financial system.
Investing directly in established lower middle market companies can potentially offer higher returns for individual investors compared to traditional investment vehicles offered by banks and Wall Street firms. These are the same firms that banks and wall street invest in directly and through other 3rd parties such ad PE Groups, Venture Capital and Hedge Funds all using "other people's money"
Here are a few key advantages:
1. Higher ROI Potential: Lower middle market companies often trade at lower valuations and have more room for growth and operational improvements, allowing investors to potentially earn higher returns on their investments.
2. Less Competition: There is typically less competition and fewer institutional investors in this market segment, creating more opportunities for individual investors to find attractive deals.
3. Avoid High Fees: By investing directly, individuals can avoid the high fees and costs associated with Wall Street investment funds, private equity firms, and banks, keeping more of the returns for themselves.
4. Long-Term Focus: Individual investors can take a true long-term view without the short-term pressures faced by institutional investors, allowing them to capitalize on the growth potential of these companies over many years.
5. Consolidation Opportunities: Lower middle market companies in niche sectors present opportunities for investors to drive consolidation strategies and create additional value through mergers and acquisitions.
6. Succession Planning: Many boomer-owned lower middle market businesses lack proper succession plans, creating potential acquisition targets for investors.
However, investing directly in private companies also carries higher risks and requires substantial research and due diligence by the individual investor. But for those willing to put in the effort, the lower middle market can offer compelling returns while avoiding the potential conflicts of interest and excessive fees associated with Wall Street intermediaries.
July 5, 2024
Photo by Kristina Flour on Unsplash