How does the square mile generate money?

[toshj]

The investment banks generate revenues through various efforts. In general they provide advisory services to clients - corporate entities, sovereigns, governments, other financial institutions. These advisory services generally focus on corporate finance - mergers & acquisitions, as well as raising debt and equity for clients. For example, through the issuance of debt, bonds and loans are created (securities) and then traded with the market.

On the capital markets side of the banks - sales, trading, research, etc. - these securities are then traded with financial institutions, such as asset managers, pension funds, insurance companies, foundations, family offices, etc. Securities are then traded on an ongoing basis depending on clients' investment appetite - the banks will take a small cut on any transaction. The banks perform loads of other services for clients too - prime brokerage, risk solutions, trade finance, etc. A simple way to look it at is this:

• The banks (and brokers) are called the "sell side" as they create the financial products before selling them to other financial institutions.
• The buyers of those financial products (pension funds, asset managers, insurance companies, private equity funds, hedge funds, etc.) are called the "buy side" as they purchase assets.

Prior to 2008 most investment banks were active in trading all asset classes - equity, interest rates, credit, FX, commodities, funds, etc. - but many have shed certain teams/divisions in order to focus on their core business. RBS' investment bank has been (re)rebranded as NatWest Markets. The RBS investment bank was active in (and had purchased) several specialist classes which they've since ditched to focus on their core capital markets businesses.

The investment banks aren't fully allowed to trade their own capital anymore, known as prop trading - as a result of the financial crisis - however a number of them have set up merchant banking/private capital teams which will generate higher returns through riskier lending activities. Also, they've been active in setting up/expanding their own investment management arms to compete with the rest of the market. The revenues generated by investment banks in London has dropped over the years through restriction of activities, but it's probably worth noting the additional revenue they generate through employee income tax/national insurance, as well as all the other industries that support banking - legal, IT, accounting, etc.

The other financial institutions in the City/West End generate revenue through management and performance fees on the assets they advise on.

 

[jsmoke]

Good answer. The heart of the beast then.

 

[toshj]

Good answer. The heart of the beast then.

In terms of the other investment firms:

The hedge funds used to run a fee model known as 2 & 20. For example, a pension fund may invest $100m with a hedge fund. The hedge fund would then charge the pension fund a management fee of 2% (on those assets) and then charge a performance fee of 20% (on revenues generated on that investment).

That model still exists to a certain degree - with some of the bigger funds charging even more - but the competitive nature of the hedge fund market has resulted in many funds dropping their fee levels in order to attract investment. Hedge fund performance has also largely been rubbish for the last year or so!

Private Equity funds employ a model with General Partners (GPs) and Limited Partners (LPs) - it's generally similar model

I think one of the most notable developments in the market is that, given that the banks have been generating decreasing revenues, and many hedge fund strategies haven't performed well of late, many financial institutions have been investing their money in private equity funds (funds that largely buy privately owned companies - known as the Private Market). However, the target investment market for PE funds is finite - there are only so many private companies that are able/worthwhile to be bought and invested in - and the PE funds don't immediately make investments and instead wait for investment opportunities. As such, private equity market is sat on cash yet to be invested (dry powder) of $1.8tn as of last year, which is an insane amount of money to be lying dormant.

 

[dowie]

Give me an example. I know city analysts try and get their clients to buy stock/shares for example I can understand that however what else goes on, surely it's just a central point for money matters and these companies could be spread out all over the country. So to say that the city is a key assets to tax revenue is a bit false it's more a case of it's a central hub.

Well good luck recruiting people if you relocate a bank to say Skegness... You'll get some IT stuff perhaps located to the likes of Birmingham, Glasgow etc.. IIRC one bank might have some front office sales staff in Brum too. But most of the revenue is generated in the city.

I'm not really sure what you're asking here though I mean in the OP you've already listed various areas that make money no - are you confused about how these areas make money?

There's trading, auditing, banks, private equity and hedge funds I get that but how and where from do they generate their money?

re: Trading - what are you referring to - if you're talking about banks then they might be acting as intermediaries, providing clearing/brokerage services, they might be providing a market/acting as a counterparty. And in the latter case they might well be creating products tailored to a client's requirements too. There are various exchanges based in London too.

Auditing - the auditors charge a fee for their services.

Private equity - they invest in companies, they sell the company on later for a higher price or via an IPO, they make money. simples...

Hedge funds - they're hardly the only people in the asset management game, there are much, much larger traditional asset management firms out there too. But hedge funds charge a fee for managing your money and also take a performance fee from the profits... you'll often hear 2 and 20 quoted, as in they have a 2% annual fee and take 20% of the profits too. In reality there is quite a bit of variation here in terms of fees and how they are structured.

You're also missing the insurance industry, commodities, consultancy firms, investment banking and law firms.

 

[NVP]

@Dis86 I'm finally with you, man.

Spoiler

 

[Dis86]

@Dis86 I'm finally with you, man.

Spoiler

Lmao. Loving the .gifs atm.

 

[NVP]

Lmao. Loving the .gifs atm.

if you haven't guessed I'm still on kind of like a self taken part time paternity leave kind of something, but I'll go back to my cave soon enough for another decade.

 

[jsmoke]

Well good luck recruiting people if you relocate a bank to say Skegness... You'll get some IT stuff perhaps located to the likes of Birmingham, Glasgow etc.. IIRC one bank might have some front office sales staff in Brum too. But most of the revenue is generated in the city.

I'm not really sure what you're asking here though I mean in the OP you've already listed various areas that make money no - are you confused about how these areas make money?



re: Trading - what are you referring to - if you're talking about banks then they might be acting as intermediaries, providing clearing/brokerage services, they might be providing a market/acting as a counterparty. And in the latter case they might well be creating products tailored to a client's requirements too. There are various exchanges based in London too.

Auditing - the auditors charge a fee for their services.

Private equity - they invest in companies, they sell the company on later for a higher price or via an IPO, they make money. simples...

Hedge funds - they're hardly the only people in the asset management game, there are much, much larger traditional asset management firms out there too. But hedge funds charge a fee for managing your money and also take a performance fee from the profits... you'll often hear 2 and 20 quoted, as in they have a 2% annual fee and take 20% of the profits too. In reality there is quite a bit of variation here in terms of fees and how they are structured.

You're also missing the insurance industry, commodities, consultancy firms, investment banking and law firms.

The point is, are they creating money or redistributing money. AFAIK, only banks through fractional reserve banking or the BOE
through printing money (QE etc) can actually create money.

If they're not creating money yet both clients and the city are getting richer each year then where is the extra money coming from.

 

[NVP]

Business. You need to Google "business".

 

[dowie]

The point is, are they creating money or redistributing money. AFAIK, only banks through fractional reserve banking or the BOE
through printing money (QE etc) can actually create money.

If they're not creating money yet both clients and the city are getting richer each year then where is the extra money coming from.

Why does someone need to be in the business of creating money in order to get richer? Not all business are banks.

The implications here seem to be flawed - for example just take one type of firm present in the city and insert into your question:

"If law firms are not creating money yet both clients and the law firms are getting richer each year then where is the extra money coming from?"

Why can't law firms and their clients both make money? Ditto to accountancy firms, insurance firms etc..etc..

 

[muon]

It apparently generates a large amount of the overall tax revenue.

There's trading, auditing, banks, private equity and hedge funds I get that but how and where from do they generate their money?

How does a hair dresser make money?

You fundamentally don't understand how services work. Most of the public don't, even though most work in the sector.

We have enough food and land to feed ourselves (at least globally). The next most valuable resource is our time to build things or perform services for others. This time dependent on the person's skills is worth a lot of money. 1 day of a person's time might be worth 10 days of someone else's time. A company might decide to employ a few hundred people with different qualities at different rates of pay to provide a specific service. That company, even after paying staff and costs may have money left over called profits.

Effectively what humanity does through money is exchange skills with each other. Natural resources such as land and what's found on that land would be endowments that some people may own.

The reason the square mile makes so much money is because we collectively (as consumers, shareholders, owners of assets) are willing to pay the companies based there a lot of money for their services because they employ the people with the skills we need.

 

[jsmoke]

How does a hair dresser make money?

You fundamentally don't understand how services work. Most of the public don't, even though most work in the sector.

We have enough food and land to feed ourselves (at least globally). The next most valuable resource is our time to build things or perform services for others. This time dependent on the person's skills is worth a lot of money. 1 day of a person's time might be worth 10 days of someone else's time. A company might decide to employ a few hundred people with different qualities at different rates of pay to provide a specific service. That company, even after paying staff and costs may have money left over called profits.

Effectively what humanity does through money is exchange skills with each other. Natural resources such as land and what's found on that land would be endowments that some people may own.

The reason the square mile makes so much money is because we collectively (as consumers, shareholders, owners of assets) are willing to pay the companies based there a lot of money for their services because they employ the people with the skills we need.

Well we do import about 60% of our food so we'd need to drastically change our standards of we were going to feed ourselves but that's a different topic.

So what your saying is it's the ground level workers that create the economy the joiners and plumbers, engineers etc.

 

[muon]

Well we do import about 60% of our food so we'd need to drastically change our standards of we were going to feed ourselves but that's a different topic.

So what your saying is it's the ground level workers that create the economy the joiners and plumbers, engineers etc.

So doo hair dressers, cleaners, teachers, lawyers, cab drivers, restaurant kitchen workers, nurses etc.

You don't have to produce a physical good to be making money. It's this abject failure of people's understanding which means they don't understand how 70% of the economy works.

 

[randomshenans]

Is this thread serious? lol

 

[Yaayuh!]

Someone's been smoking too many J's.

 

[h4rm0ny]

If they're not creating money yet both clients and the city are getting richer each year then where is the extra money coming from.

Money is created all the time. There's more money today than there was yesterday. There'll be more money tomorrow than there is today. Your mistake is to think of money as something finite that must be found and if one person gains money, someone else somewhere must have lost that money. That's not how it works. You can confirm this with a trivial observation by comparing the amount of money (£'s, $'s, whatever) in circulation on a year by year basis.

And if you're about to conflate money with wealth (which would be fallacious for a few reasons), then I'll forestall it by saying wealth gets created every day too. Usually with the input of credit. A pile of stone, timber and a lump of copper? Low wealth. The same materials in a house with electricity - much greater wealth. And the transformation accomplished by the input of credit. Credit being a formal quantification of trust. Trust is one of the most valuable qualities our species needs. Financial traders commodify and trade in that quality.

 

[jsmoke]

Is this thread serious? lol

Go and eat some frogs.

 

[jsmoke]

Money is created all the time. There's more money today than there was yesterday. There'll be more money tomorrow than there is today. Your mistake is to think of money as something finite that must be found and if one person gains money, someone else somewhere must have lost that money. That's not how it works. You can confirm this with a trivial observation by comparing the amount of money (£'s, $'s, whatever) in circulation on a year by year basis.

And if you're about to conflate money with wealth (which would be fallacious for a few reasons), then I'll forestall it by saying wealth gets created every day too. Usually with the input of credit. A pile of stone, timber and a lump of copper? Low wealth. The same materials in a house with electricity - much greater wealth. And the transformation accomplished by the input of credit. Credit being a formal quantification of trust. Trust is one of the most valuable qualities our species needs. Financial traders commodify and trade in that quality.

So it all boils down to rocks and timber. I knew money was both created and destroyed. The economy has to be continually growing for this system to work. However there must be a critical point in the future when things are saturated(goods and services) too many people, houses and not enough resources or jobs.

 

[Raymond Lin]

So it all boils down to rocks and timber. I knew money was both created and destroyed. The economy has to be continually growing for this system to work. However there must be a critical point in the future when things are saturated(goods and services) too many people, houses and not enough resources or jobs.

More people = more demand = more services = more goods required.

More housing, more food, more energy, more and more.

Supply and demand.

 

[h4rm0ny]

So it all boils down to rocks and timber. I knew money was both created and destroyed. The economy has to be continually growing for this system to work. However there must be a critical point in the future when things are saturated(goods and services) too many people, houses and not enough resources or jobs.

Humanity has never yet, to my knowledge, reached a point where it feels it "has enough".

What does happen is that there is sometimes a chronic breakdown in trust (credit) and people aren't willing to assist each other in attaining their desires (mortgages aren't available to buy a house, loans aren't available to expand your business, jobs aren't available because employers think the risk is too great or their customers aren't willing to buy). These are crashes, depressions, etc. But "saturation" of goods and services? Not really. In any given market sure. But that's a seller's problem not a buyer's. And from your tone about "belly of the beast" and other comments, I get the feeling it's the buyers you sympathise with, not the sellers.