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Bloomberg News reports that Washington pulled another Sunday night special -- wiping out Wall Street as we have known it. Ironically, this move will put Wall Street back where it was prior to the Great Depression. How so? Last night the Fed approved changing Morgan Stanley (NYSE: MS) and Goldman Sachs (NYSE: GS) from investment banks to commercial ones. Morgan Stanley -- which may sell up to 20% of itself to Mitsubishi UFJ and may put merger discussions on hold -- and Goldman Sachs now have greater odds of remaining independent.
Most significantly, the change will allow both banks to take consumer deposits and get short-term loans from the Fed. In exchange for that cheap money, they will need to increase the amount of capital they have, take less risk, and submit themselves to tighter regulatory scrutiny. The capital increases are the most significant piece of this new puzzle. According to the New York Times, "Goldman Sachs has $1 of capital for every $22 of assets; Morgan Stanley has $1 for every $30. By contrast, Bank of America (NYSE: BAC) has less than $11 for every $1 of capital." Goldman and Morgan will be required to raise significant capital to reach that 11 to 1 ratio. How they do that still remains a mystery.
Ironically, prior to the Great Depression, banks like JPMorgan operated both commercial and investment banks -- taking deposits from consumers and doing stock offerings for business. I was surprised to learn that they already have billions in deposits. "Morgan Stanley had $36 billion in retail deposits as of August 31 and Goldman Sachs had $20 billion," according to the Times. Now, they'll need to add branches and invest in marketing and systems to expand that amount. So, although the industry will return to its pre-Great Depression structure -- it will be more tightly regulated than it was back then.
The implications of this change are significant for bankers and the cities where they live. That's because enormous bonuses for Wall Streeters are history. In addition, this change will leave a huge hole in the economy of New York which depends so heavily on those big investment banking bonuses to fuel its real estate market, not to mention its expensive restaurants and other "finer things in life".
And this raises big questions about what will happen to all the MBAs who formerly streamed to Wall Street after graduation. If the global financial markets can survive this crisis, it would not surprise me to see investment banking revive in its current form through start-ups capitalized by institutional investors. Some of these MBAs could go into hedge funds or private equity -- but a regulatory crack down on those market players could also be in the offing. This could mean that MBAs actually have to manage businesses instead of shuffling financial papers.
Huge questions remain about whether we can make it through the current catastrophe. And for now this change in Wall Street is a bit of a side show.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.
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Reader Comments (Page 1 of 1)
9-22-2008 @ 2:47PM
shelly cook said...
once again the retired folks relying on fixed income are forced to help fund the misdeeds of the feds for allowing all this to happen.why not put more pressure on the ceo's to forgo the multi billion dollar benefits they derived while the firms they represented went down the tubes???
9-22-2008 @ 1:09PM
Rex said...
Uh, you forgot to blame the Republicans or McCain for something in this article...
9-22-2008 @ 1:13PM
brooks barker said...
You said it Shelly; it is time to put a greedy MBA in a locked phone booth on Wall Street; when another as greedy is found, take out the first and shoot him; put the new MBA in the phone booth. Guaranteed to solve the problem.
9-22-2008 @ 6:04PM
Tom Flaity said...
Poor John McCain...two weeks ago he was praising the America economy as "strong" in rally speeches around the country. This week he has a new ad out saying that he will take on Wall Street when he is elected, saying he has taken on tougher foes before. Truly Funny!
9-22-2008 @ 6:07PM
Sheila said...
Now we know what lax regulation and Republican " supply side" economics gets us.
9-23-2008 @ 6:24PM
Jon said...
Blame the LIBERALS. Their bleeding heart policies pushed the government to, in turn, push companies like Freddie and Fannie to give home loans to people with low-incomes and no clear way of paying back those loans. Now that these people are defaulting en-masse, the whole financial system is coming down like dominoes!
9-23-2008 @ 12:24AM
gerald said...
Impeach the entire govt it's time to start over. We have lost sight of what it means to be american. It's all about lobbiest and special interest groups. We have no say in how our tax dollars are spent anymore. Who is giving us a bridge loan? Who is bailing us out? No one thats who. Let the bad businesses fail its called free market. It may hurt but it is the right thing to do.
9-25-2008 @ 8:07AM
BOB said...
Hold them Lible for what they did audit all from Bush down and don't let walk away with there fat pockets.
9-23-2008 @ 1:10PM
Jens said...
If we are going to bail out the banks and investment firms, rather than just giving them a gift with some strings-of-hope attached, we should do it through the vehicle that provides each contributing taxpayer with added value to their personal balance-sheet ... issue us appropriate levels of Preferred Stock in these bailed-out companies. This way we benefit if the bailout works, and if it doesn't work we get what we would anyway under the current bailout proposal ... financial loss and recession.