Banking Law

Glass-Steagall: Buh-Bye!

My initial reaction to the news that Goldman Sachs and Morgan Stanley are becoming bank holding companies mirrors the initial thoughts of The New York Times (perish the thought!).

• the leverage ratios of both investment banks will be drastically reduced, consequently reducing the severity of any mischief that the holding companies could achieve. The maximum leverage ratio that can be achieved and still be considered "well capitalized" under FRB Prompt Corrective Action regulations is 15:1 (Citicorp's current leverage ratio). Morgan Stanley's leverage ratio is currently 30:1 and Goldman's 22:1, so they will be shrinking their balance sheets.
• "[T]he move signals the final end to the Glass-Steagall Act, the epochal legislation of 1933 that signaled a split between investment banks and retail banks." Yep. Who knows what dreams may come from this final breakdown of 70+ year-old barriers?
• Nouriel Roubini was right (again) in asserting that the old investment bank model was "broken" and that investment banks of the future could not exist outside the commercial banking business model, with its access to insured deposits and other stable sources of liquidity.
• "Now, Goldman and Morgan Stanley, which have been the subject of merger speculation in recent weeks, can become direct competitors to larger firms like Citigroup, JPMorgan Chase and Bank of America. Those firms combine investment-banking operations with the larger capital cushions that come with retail deposits, giving them a stability that pure investment banks lack." Not only that, but with bank holding company status already approved by the Fed, Goldman and Morgan Stanley can become "playahs" in resolving future bank meltdowns, which leads us to the final preliminary point.
• "Given the expected bank failures this year, it is possible Goldman and Morgan Stanley could seek to buy them cheaply in a 'roll-up' strategy." From merger bait to predators in just a few days.

I've not seen a week quite like this one in 34 years of practice, not even in the 1980s. Perhaps it's the effect of the "Internet Age," but once-in-a-half-century changes in the structure of financial institutions used to take just a tad bit more time than they do in the 21st century.

Get ready for a whole new world, dawning in the blink of an eye.

Full post as published by Bank Lawyers Blog on September 22, 2008 (boomark / email).