Swimming With Sharks, Part Two: A Map of the World of Finance

May 20, 2017

Many people do not understand or often have an incomplete understanding of basic business structure of the financial markets. The purpose of Part 2 of the “Swimming with Sharks Series” is to provide you with what author Joris Luyendijk calls the “Map of Planet Finance,” and thereby give you a basic, high-level understanding of the structure of the financial markets.

Based on his interviews, Luyendijk breaks down the financial world into three broad categories.

       1. Asset Management
       2. Insurance
       3. Banking

The above three categories are very broad, and the lines between them are often blurred and overlapping, but the explanations of the categories should leave you with a fairly accurate big picture, or “map of planet finance. "

      1. Asset Management 

The Asset Management category refers to the collection of firms that charge fees for managing large sums of money for big companies, institutional investors (i.e. pension funds), governments, insurance companies, and high wealth individuals, etc. These asset management firms invest the assets of those groups in a wide variety of financial products. Some simple examples of how the Asset Management firms invest on behalf of their clients are the buying and selling of stocks and bonds or by investing in the growth of entrepreneurial companies with the expectation of returns, but there are many other more complex and sometimes risky investment strategies employed by some asset management firms.

       2. Insurance
The Insurance category encompasses the already well-known insurance products such as car insurance, property insurance, business insurance, etc. Often unknown, however, is that some large insurance companies have been for a long time and are now in increasing measure offering insurance on financial products themselves. Large investors wanting to protect against a loss on their investments can purchase an insurance policy on the paper assets they have invested in. For example, many large investors obtained insurance from the insurance company AIG to protect against losses on their purchase of the mortgage related financial products that precipitated the 2008 market crash. 

       3. Banking
The banking category is comprised of two main components. Though often overlapping in their activities, these two banking components can be more or less separated into: Commercial Banking and Investment Banking.

Commercial Banking involves what Luyendijk describes as “activities that our grandparents would still recognize.” These activities include things such as checking and savings accounts, the payment systems, and home, business, and municipality loans. You go to a commercial bank to deposit your paycheck or make a cash withdrawal from your account.

Investment Banking is fundamentally different. Luyendijk writes, in investment banks “you’ll see traders on their trading floors, the dealmakers who get companies listed on the Stock Exchange, those who work in corporate finance or mergers and acquisitions, and also the ‘structurers’ who invent and build financial products – for instance the Collateralized DebtObligations (C D O’s) we heard so much about thanks to the crash [of 2008]”*

As we mentioned above, these three broad categories are not so rigid and separate in actuality, but these categories offer a basic picture of the structure of the world of finance. This basic understanding is an important foundation for understanding the upcoming parts in the “Swimming With Sharks Series.”

There are many other related activities and business that support the financial world and basic structure above, such as accounting firms, law firms, credit ratings agencies, Information Technology, and regulators. These other activities are essential to the current functioning of the larger financial system, but additional details about them are not necessary for the purpose of this part of the series.

Next week’s Part 3 will provide you with a brief and high-level understanding of what happened in the 2008 financial crash.

*This quote and the information included in Part 2 of the “Swimming with Sharks Series” is taken from Swimming with Sharks: Inside the World of the Bankers, by Joris Luyendijk, pp. 34-37. Guardian books, 2016.

Are you New to the “Swimming with Sharks Series?”
The “Swimming with Sharks Series,” published by Century Silver Exchange, Inc., was developed after reading a book by author Joris Luyendijk titled Swimming with Sharks: Inside the World of Bankers. This series highlights and breaks down some of the key points from the book into “bite size” increments for anyone who desires to:

• Gain a better basic understanding of the banking and financial world
• Understand the 2008 financial crash
• Understand where the banking and financial world is today and where it is headed
• Know the concrete steps to take to protect your hard-earned wealth

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