Corporate Governance

The Inevitable Disappearance of Investment Banking Firms

By J. Robert Brown

We noted back in 1995 that investment banks would disappear, an inevitable result of the repeal of Glass Steagall.  See The "Great Fall": The Consequences of Repealing the Glass-Steagall Act.  As those following the markets already know, the current financial turmoil has resulted in the disappearance of a separate class of large investment banking firms.  Lehman failed.  Merrill and Bear Stearns have become subsidiaries of commercial banks.  Goldman and Morgan Stanley have coverted to commercial banks.  Thus, only Goldman and Morgan remain but they have subjected themselves to oversight of bank regulators (a more conservative, risk averse regulatory approach).  The swashbuckling days of yore in the investment banking area are over.

The evolution of the market is not, however, complete.  Morgan Stanley and Goldman as free standing entitites are likely either to disappear or merge with other commercial banks.  In other words, the name may remain but the business will be different.  The change is inevitable.  As the conservative weight of the Federal Reserve Board and other banking regulator descends, they will find that they need additional sources of funding and additional sources of business.  This will force them to become more like commercial banks, something that will include the persuit of deposits. 

But the more direct impetus may be from the market.  Both firms are suffering.  Last Friday, Goldman's shares fell by 10%.  Morgan Stanley is trading somewhere around $14.  Even a modest run on confidence will force these financial institutions into the arms of others.  It is only a matter of time.

Full post as published by The Race to the Bottom on November 11, 2008 (boomark / email).