Why the Investment Banking Model is Dead
The investment banking model that contributed to the subprime crisis is dead and investors will now refuse to buy products where the risk is not transparent, strategists told CNBC Europe Tuesday.
"I don't think life is going to come back into the kind of exotic credit-derivative, credit-default type products for many years," David Roche, global strategist at Independent Strategy, told "Squawk Box Europe." "I think that sort of business is just so dead."
The repackaging of debt that originated in the banking sector, such as mortgages, was originally thought to provide a cushion for the financial markets, but the collapse of US house prices last year slashed the value of the products and sent shock waves through the banks.
"From an investors' point of view there is going to be an investor strike, they will not buy anything where the risk is not transparent." Bob Parker, vice chairman at Credit Suisse Asset Management said. "That transparency applies to a lot of the instruments that were sold over the last two years."
Many investment banks are still struggling to find a true value for their collateralized debt obligations (CDOs) and the ones that have found buyers have sold at fire-sale prices.
Wall Street giant Merrill Lynchsold $30.6 billion of CDOs at just 22 cents on the dollar, near one fifth of their peak cost, to an affiliate of private equity firm Lone Star Funds.
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