Gripedujour

Goodbye to All That…

You may have thought that the credit crisis or the subprime meltdown signified the end of the modern gilded age on Wall Street. You may have thought that the collapse of Bear Stearns, Merill Lynch, AIG was the end. You may have thought it was last week when the U.S. Government decided to bailout capitalism to the tune of $700 billion.

You’d be wrong.

The New York Times is reporting this morning that Goldman Sachs and Morgan Stanley are requesting, get that: requesting, to transform themselves into bank holding companies that will be subject to far greater regulation, close supervision by bank examiners and other government agencies. This means that the last two independent investment banks on Wall Street are throwing in the towel on the old way of doing business (wasn’t “old” until last week). It is, in fact, a “blunt acknowledgement that their model of finance and investing had become too risky and that they needed the cushion of bank deposits that had kept big commercial banks like Bank of America and JPMorgan Chase relatively safe amid the recent turmoil.” According to the Times.

Goodbye to seven-figure bonus and “lavish perks” for midlevel executives and hello to a Wall Street the way it was prior the great depression. This is the end. There is no more separation between investment banking and commercial banking in the United States.

From the Times:

By becoming bank holding companies, the firms are agreeing to significantly tighter regulations and much closer supervision by bank examiners from several government agencies rather than only the Securities and Exchange Commission. Now, the firms will look more like commercial banks, with more disclosure, higher capital reserves and less risk-taking.

For decades, firms like Morgan Stanley and Goldman Sachs thrived by taking bold bets with their own money, often using enormous amounts of debt to increase their profits, with little outside oversight.

They were the envy of Wall Street, dominating the industry’s most lucrative businesses, landing headline-grabbing deals and advising companies and governments around the world on mergers, stock offerings and restructurings.

But that brash model was torn apart over the last several weeks as investors lost confidence in the way they made those bets during the recent credit boom, when investment banks expanded with aplomb into esoteric securities, the risks of which were not easily understood.

Over several harrowing days, clients started pulling their money, share prices plunged and these banks’ entire enterprises were brought to the brink.

In exchange for subjecting themselves to more regulation, the companies will have access to the full array of the Federal Reserve’s lending facilities. It should help them avoid the fate of Lehman Brothers, which filed for bankruptcy last week, and Bear Stearns andMerrill Lynch — both of which agreed to be acquired by big bank holding companies.

More:

Just a year ago investment banks, the titans of global finance, considered bank regulation a millstone to be avoided at all costs. Commercial banks have to subject themselves to restrictions on how much money they can borrow and what kinds of businesses they can be in. Lobbyists for firms like Goldman spent years fending off closer supervision of their business.

As bank holding companies, the two banks, whose shares have lost about half their value this year, will have to reduce the amount of money they can borrow relative to their capital.

That will make them more financially sound but will also significantly limit their profits. Today, Goldman Sachs has $1 of capital for every $22 of assets; Morgan Stanley has $1 for every $30. By contrast, Bank of America’s has less than $11 for every $1 of capital.

JPMorgan Chase acquired Bear Stearns this spring in a fire sale brokered by the federal government, while Bank of America has agreed to buy Merrill Lynch for $50 billion.

As bank holding companies, Morgan and Goldman will have greater access to the discount window of the Federal Reserve, which banks can use to borrow money from the central bank. While they were allowed to draw on temporary Fed lending facilities in recent months, they could not borrow against the same wide array of collateral that commercial banks could. The discount window access for investment banks is expected to be phased out in January.

It will take time for Goldman and Morgan to transform into fully regulated banks because they cannot quickly reduce how much money they borrow relative to their assets. The Fed and the Securities and Exchange Commission have had examiners at investment banks since March, giving regulators huge insight into their operations.

Full Story here.