So is this really a ticket for them to do business as usual? I'm reading on the Wall Street Journal this morning that Goldman Sachs and Morgan Stanley will be converted into regular banking holding companies. So now they are to be like Citibank and Wachovia and Washington Mutual?
For sure, this will pair them down a lot. The days of 40-1 leverage are over for them. The boys and girls at the trading desks at Goldman might be hitting that aged whiskey a little more tonight. No more being capitalist cowboys for them.
Yet, and forgive me for sounding like a skeptical bastard..but I am a skeptical bastard, there's something gnawing at me here. Like the WSJ article points out, this could save them from marking to market those toxic securities. It also puts them in a better position to buy other outfits. But aren't the normal banks also in trouble?
Becoming a bank holding company can help both Morgan Stanley and Goldman organize their assets, and puts both in a much better position to be acquired, to merge or to acquire smaller companies with insured deposits. It also may allow Goldman and Morgan Stanley to avoid using of mark-to-market accounting -- which forces companies to value their assets based on the current market price. Instead, these firm may be able to classify assets as "held for investment," as many banks do.
- excerpt from "Goldman, Morgan Scrap Wall Street Model", WSJ.com, 2008
It's interesting that the Wall Street Journal is pointing out how this flies in the face of Treasury Secretary Hank Paulson's big plan. The man from Goldman probably did want to preserve the investment banking model. Hey, you never know, he may need a job come January. This shows that perhaps the Federal Reserve and the Treasury may not be working on the same page, despite appearances. Also, could this move be indicative to any resistance the Paulson Plan may be facing?
Another thing, investment banking, as an activity on to itself, probably now could no longer be separated from commercial banking. Sure, if a new retail bank were to open up, they DON"T have to get into investment banking. Yet the existing banks, what of their investment banking operations? One rumor, and I preface it as such because no one's heard nothing official, was a rebirth of Glass-Steagal. What the Federal Reserve did, in essence, was to put the final nail in the coffin to the idea of an independent investment banking industry.
Perhaps this is a good thing. The Paulson Plan, I'm skeptical on. Something needs to be done about those bad loans, that is for sure. Also, and many won't like what I'm about to say, investment banking is an industry this country needs to keep. Do we really want to have it so that investment banking is done mainly overseas? I'm sorry, but that's too much power to hand over. Saying all that, reigning in the activities of investment bankers was long over due. Perhaps...just perhaps, this new bank model may do what was needed all along. Still, I'm a skeptical bastard.