Tuesday, September 23, 2008
MS & GS Become Banks
New York's last two remaining independent i-banks are changing their status and becoming banks. But aren't they banks already?
Well, yes and no. They are investment banks, which isn’t quite the same thing. I-banks are not licensed to take in deposits like regular banks, which of course prevents them from profiting by such tiresome drudgery as simply looking after customers’ money for them. But it also means that they are not subject to all those pesky, time-consuming and very expensive regulations about capital requirements that apply to regular banks – a lightness of touch on the corporate tiller which suited them very well indeed until about 10 days ago.
The world post-Lehman’s and AIG looks a very different, and much less hospitable, place in which to engage in such footloose and freewheeling capitalism. So, both Goldman Sachs and Morgan Stanley have had their applications to become traditional bank holding companies - directly regulated by the Federal Reserve – fast-tracked through to approval. Anyone who’s desperate to lodge their life-savings in an account with Goldman Sachs or Morgan Stanley has just seen their dream move a step closer as consequence.
But the bosses of these two humbled giants are keeping strangely quiet about the real reason they have so eagerly sought the constraining embrace of regulation. Regular banks can access the Fed’s ‘lender of last resort’ function for emergency loans and financial support. Something which both Goldman’s and Morgan Stanley may both very well be in need of in the near future. Some commentators see even this capitulation as only an intermediate stage, something to keep them out of trouble until suitably large, stable and well-funded merger partners can be found. How are the mighty fallen.
After Friday’s record gains, the markets on Monday are in more reflective mood, with bank shares down again and the FTSE dropping 0.25%. The details of the proposed vast US rescue plan are being eyed more carefully, as are the consequences of the temporary ban on shorting. Events in the ‘real economy’ are looking gloomy too – house prices fell by 1% in August, and unemployment is rising apace – so the prospects are far from rosy. What happens in the next phase – the coming few weeks or months – will determine whether last week’s bloodbath was the beginning of the end, or just the end of the beginning.
Well, yes and no. They are investment banks, which isn’t quite the same thing. I-banks are not licensed to take in deposits like regular banks, which of course prevents them from profiting by such tiresome drudgery as simply looking after customers’ money for them. But it also means that they are not subject to all those pesky, time-consuming and very expensive regulations about capital requirements that apply to regular banks – a lightness of touch on the corporate tiller which suited them very well indeed until about 10 days ago.
The world post-Lehman’s and AIG looks a very different, and much less hospitable, place in which to engage in such footloose and freewheeling capitalism. So, both Goldman Sachs and Morgan Stanley have had their applications to become traditional bank holding companies - directly regulated by the Federal Reserve – fast-tracked through to approval. Anyone who’s desperate to lodge their life-savings in an account with Goldman Sachs or Morgan Stanley has just seen their dream move a step closer as consequence.
But the bosses of these two humbled giants are keeping strangely quiet about the real reason they have so eagerly sought the constraining embrace of regulation. Regular banks can access the Fed’s ‘lender of last resort’ function for emergency loans and financial support. Something which both Goldman’s and Morgan Stanley may both very well be in need of in the near future. Some commentators see even this capitulation as only an intermediate stage, something to keep them out of trouble until suitably large, stable and well-funded merger partners can be found. How are the mighty fallen.
After Friday’s record gains, the markets on Monday are in more reflective mood, with bank shares down again and the FTSE dropping 0.25%. The details of the proposed vast US rescue plan are being eyed more carefully, as are the consequences of the temporary ban on shorting. Events in the ‘real economy’ are looking gloomy too – house prices fell by 1% in August, and unemployment is rising apace – so the prospects are far from rosy. What happens in the next phase – the coming few weeks or months – will determine whether last week’s bloodbath was the beginning of the end, or just the end of the beginning.
