Fed Allows Goldman, Morgan Stanley to Become Banks

[Yan He]

http://bloomberg.com/apps/news?pid=20601087&sid=avXkDayu9Geg&refer=home

I understand that this approval will give GS and MS access to Fed loan like other banks, but still not sure how it would affect other aspects of the business: like the ratio of risk adjusted capital...ect. ??

 

[Andy Nguyen]

The Wall Street as we know it is gone. There is no investment bank in this country anymore. Just like commercial banks trying to buy investment banks to expand their operation, now investment banks needs to become commercial banks to stay alive.
Soon, we will be able to open a checking account from Goldman Sachs Bank for our local branches. Or a saving account from Morgan Stanley. How prestigious it would be?
In the future, much of us will be working for commercial banks, hedge funds or US operations of European commercial banks.
Since they can tap directly into their retail saving, checking accounts, these banks won't have to borrow much. They will no longer be able to use leverage like before (LEH had a 30:1 leverage while BoA has 11:1, JPM has 13:1 and Citigroup has 15:1). They will go under stricter rules.

 

[woody]

So if they become banks, they will be subject to banking regulations? Maybe the Wall Street where we just rename something to get around regulations is done.

 

[doug reich]

Woody, that is the implication of this article in WSJ:

Business - WSJ.com

The Federal Reserve said it had approved the transformation of both Morgan Stanley and Goldman Sachs from investment banks to traditional bank holding companies, a step that would place the last two Wall Street titans under the close supervision of national bank regulators, subjecting them to new capital requirements and additional oversight.



The Fed said it would also extend additional lending to the broker-dealers of the two firms, in addition to Merrill Lynch's, as they make the transition.


The steps effectively mark the end of Wall Street as it has been known for decades, and formalizes a quid-pro-quo that regulators have warned about in the months after Bear Stearns's near collapse -- in return for access to the Fed's emergency lending facilities, the firms would need to subject themselves to more oversight. The step could have far reaching effects on their profitability and their business models.

And the original statement:

Real Time Economics : Fed Statement on Goldman, Morgan Stanley

Perhaps that version of Wall Street is done, as you say, however this does not prohibit some other player from entering this space. Some people will crave the returns that only enormous leverage can bring you, which will bring us back to that point, don't you think.

 

[woody]

Will hedge funds become mutual funds? CDS becomes insurance? An interesting time to be in financial engineering, huh?

 

[Yan He]

FED regulated as I can see now for MS, is the regulation for our Utah Bank. Not sure if this regulation would affect to what extend the leverage level and other aspects of business.

 

[Stefan Zota]

Not sure if this regulation would affect to what extend the leverage level and other aspects of business.

This is the question on Wall Street.
Hard to anticipate. I have mixed opinions in this space. The culture of the two companies is very strong in some way elitistic (pure meritocracy) so I think they will be pretty special banks. I see them more like financial services entities regulated by the Fed.

Not so easy to imagine a shift from high networth individual to retail ...

 

[Andy Nguyen]

This is a special time on Wall Street. Not many people lived through a crisis with this magnitude before so we are entering into uncharted water now.
The ramification of this would take years to fully comprehend.
What a week that was. I didn't even get to know Wall Street well enough and now it's a whole different culture, landscape out there.
In the weeks and months ahead, we will soon learn how this affects us directly or in many indirect ways.

 

[Yan He]

This is the question on Wall Street.
Hard to anticipate. I have mixed opinions in this space. The culture of the two companies is very strong in some way elitistic (pure meritocracy) so I think they will be pretty special banks. I see them more like financial services entities regulated by the Fed.

Not so easy to imagine a shift from high networth individual to retail ...

I don't see this "shift from high networth individual to retail" But I may expect an expand/strengthen of our retail business.

With the alliance with Mitsubishi, more complication is added to this situation now

 

[alain]

This regulation will affect Goldman and MS heavily because they will be regulated as banks. So, they will have to deleverage and as a consequence, increase their capital reserves. It means they won't be able to take as big of risk as they were taking in the past and and it will be harder to achieve the earning multiples they were getting in the past.

On the other hand, they will be able to buy banks which might not be a bad thing... I'm expecting to see a MS or a Goldman branch opening soon HAHAHA

 

[Aditya Chitral]

It is interesting to think, how many would change their normal checkings account or salary accounts to either of these banks.

 

[Yan He]

This regulation will affect Goldman and MS heavily because they will be regulated as banks. So, they will have to deleverage and as a consequence, increase their capital reserves. It means they won't be able to take as big of risk as they were taking in the past and and it will be harder to achieve the earning multiples they were getting in the past.

On the other hand, they will be able to buy banks which might not be a bad thing... I'm expecting to see a MS or a Goldman branch opening soon HAHAHA

Check MS Utah Industrial Bank, which has been existing for years....one of our retail bank, if you want to open account with Morgan Stanley. :dance:

 

[alain]

Industrial Banks are not really National Banks but state institutions. Check this [wikipedia]Industrial_loan_company[/wikipedia]

 

[Yan He]

That's what MS's next step: to make nationalized of Utah Bank....instead of merge with Wachovia...

 

[alain]

still, they will need to de-leverage and increase their cash reserves.

 

[kean]

what quants are going to be>> business analyst??

 

[Andy Nguyen]

There is nothing wrong with business analyst, is there?
If anything, this would make a lot of people rethink their career. If Wall Street's biggest investment banks rethink their business model, we ought to rethink our plan as well.
I always thought of doing this as a job that paying my bill. Anything that pays the bill, i'll do. If I happen to enjoy this line of work and it pays much better than others, the better.
Would it make people millionaire? I hope so. It depends on luck, being the right place at the right time but after last week, the probability of making quick buck is dramatically reduced. I would seriously doubt if anyone can say his/her job is very secure in this market.
For now, I'm content with still having a job, having enough to pay bill and putting food on the table.
If the fallout of all this is that banks decide to get rid of risky business, then many more people will hit the street but it's life. There isn't anything to be upset or mad about. I wouldn't necessarily look down on business analyst positions if i'm out of a job.
The alternative is what? Unemployment?
Put in the shoes of CMU students who are about to graduate with 100K+ loan, or people who worked for Bear, Lehman for years and things will fall into perspective reall quick.

 

[woody]

We will need financial engineers to come up with new products that salespeople can use to trick investors.

 

[Uncle Max]

still, they will need to de-leverage and increase their cash reserves.

Not only that. They are also entering the business where companies like Citi, JP Morgan, Bank of America etc. have been for centuries. I don't think they are willing give their market share for anybody, that's why competition will be tough.

It seems like MS and GS want to go back to an investment bank status once storm is over. Otherwise they will have to merge with a bigger player.

 

[alain]

All of them (including GS and MS) have been on the same business, the difference is that MS and GS were not regulated by the bank regulators so they were sort of free but now things are going to be little different.

One thing that will change radically is basically the payouts. The big fat bonuses might disappear.

I was talking to my boss and there is a clear solution to all this, take the whole company private. The buck will stop right there. The problem is that these companies are so big now that I don't know how they can finance a deal like that in the current circunstances.