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.