Why Some Firms Thrive While Others Fail: Governance and Management Lessons from the Crisis

By Thomas H. Stanton | Go to book overview

6
Company Organization, Business Models,
and the Crisis

I would advocate moving the GSEs out of No Man’s Land. Events have
shown how difficult it is to balance financial, capital, market, housing,
shareholder, bondholder, homeowner, private, and public interests in a
crisis of these proportions. We should examine whether the economy and
the markets are better served by fully private or fully public GSEs.

—DANIEL MUDD, 2008

Organization played a major role in the financial crisis. A firm’s organization defines the rules by which it must operate. Managers either work within those rules to create favorable circumstances or change their organizational status. Changes in organizational form occurred before the crisis, for example, when Wall Street firms converted from partnerships into investorowned companies, and during the crisis when Goldman Sachs and Morgan Stanley converted into bank holding companies backed and supervised by the Federal Reserve.

This chapter considers first the formal structure of various types of financial firm and then implications for the business models that these firms adopted before the crisis. Among the most important business models were portfolio lending, popularly known as the storage business, and transaction-based finance, popularly known as the moving business.

From an organizational perspective, competition among financial firms takes place on anything but a level playing field. Three major factors are (1) a firm’s size and complexity, (2) the charter or other legal framework under which it operates, and (3) whether it is a partnership or investor-owned.

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