The End Of The Investment Banking Era
The last two remaining independent investment banks, Morgan Stanley and Goldman Sachs have seen the writing on the wall and have applied to the Federal Reserve in order to convert into commercial banking institutions.
The Wall Street that shaped the financial world for two decades ended last night, when Goldman Sachs Group Inc. and Morgan Stanley concluded there is no future in remaining investment banks now that investors have determined the model is broken.
The Federal Reserve’s approval of their bid to become banks ends the ascendancy of the securities firms, 75 years after Congress separated them from deposit-taking lenders, and caps weeks of chaos that sent Lehman Brothers Holdings Inc. into bankruptcy and led to the rushed sale of Merrill Lynch & Co. to Bank of America Corp.
The big issue is the ability to raise capital by the cheapest means possible and right now that is by taking on deposits. Investment banks normal method of raising capital, selling bonds has become very expensive, the bond market has been chaotic ever since bond insurers had their credit rating downgraded which sent interest rates upwards across the board.
Another method of raising capital is to sell equity but that is never popular with shareholders since it reduces the value of their existing stakes. Morgan Stanley had agreed to sell a 20% stake to Mitsubishi UFJ Financial Group Inc. for about $8.4 billion when it was unable to find a U.S. bank to merge with.
A big change for the two companies is that it will now be regulated by the Federal Reserve instead of the Securities and Exchange Commission. Another big change will be that they will now fall under U.S. deposit laws which will most likely lead to less risk taking by both companies.
Although the change will provide the two companies with much more long term security it may also mean lower profits. Despite the upheaval of financial markets over the past year, both companies were still able to report positive net earnings although greatly reduced from previous years.
The positive to take out of all of this is that both companies are well placed to become powerful commercial banking institutions.
