Morgan and Goldman Become Holding Companies

The investment banking climate on Wall Street drastically changed after the Federal Reserve announced that Morgan Stanley (MS) and Goldman Sachs' (GS) application to become bank holding companies was approved.  The deal fundamentally changes the notion of independent investment banks, as the two largest remaining investment banks are now subject to increased regulation and scrutiny. 

The Federal Reserve announced the news on Sunday evening in a press release which can be found here.  According to a Bloomberg report, the Fed stated that the actions were taken "to provide increased liquidity support to these firms as they transition to managing their funding within a bank holding company structure."  The Fed's actions reinforce the impression that they will not allow Goldman Sachs and Morgan Stanley to fail.  Speculation crossed Wall Street in this past week on possible merger activity between Morgan Stanley and Wachovia (WB), as shares of the bank plummeted this week.  Goldman Sachs' shares dropped dramatically as well, crossing below the $90 per share price intraday on Thursday.  

As a result of the plan the investment banks will have access to the Fed Discount Window.  The banks have had access to the window recently, but it was previously expected that they would not have access to the lending facility after January 2009. 

However, this deal increases the amount of regulation which the banks will face.  For example, the amount of leverage will be limited, reducing the amount the banks can borrow.  The NY Times reports that the deal will also bring about "a host of accounting rule changes that should benefit the two banks in the current environment."  The drastic changes come after a dramatic week on Wall Street, and the plan should provide stability to the investment banks in the intermediate term. 

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[williambanzai7:]

The Great Subprime “Babel”—A Modern “Tail” of Biblical Greed

Wall Street never changes. The pockets change, the suckers change, the stocks change, but Wall Street never changes because human nature never changes. - Jesse Livermore

The public’s annual loss to Wall Street has usually been estimated in former years at $100,000,000 per annum, but owing to the more recent enterprising methods of the “Street” in manipulating the game, this estimate is now far to small as we shall see.-Franklin Keyes (1904)

Conceit of the Street

Shortly after the explosion of the great “dot.com” bubble something happened that was to change the monetary affairs of all men on Earth.
The investment banking tribes had once again begun to proliferate and fill the Street. They spoke a new tongue--the lanauge of rampant financial innovation. They thought they understood one another well. It was a strange tongue with words like synthetic CDOs, conduiting, CLOs, SIVs, bespoke swaps, CDOs squared, negative default correlations, binomial expansions and stochastic modeling. A tongue curiously reminiscent of the tongue of the House of ENRON.

The generations of bankers before the “dot.com” bubble used fundamental investing and global muscle, paying attention to the fundamental laws of securitiof es analysis and diversification. They were believers in the book of Graham and Dodd.

But the new generation of investment bankers was different. They stressed an opposite code of investing. The smart investor did not count. Their game was a vast opaque pool of derivatives and asset backed securities. Had they confined themselves to this kind of financial life in a modest fashion, all might have been well. But the obscene fee income made possible by cheap leverage, complex financial engineering and securitization techniques made them ever greedier and their stupidity made them think they could beat the financial laws of thermodynamics.

They decided to build a great Tower of mortgage backed securities. The tower would allow them to pillage the housing markets and at the same time and make it possible for them to seemingly eliminate all risk for themselves. Heads we win, tails you lose; that was their credo. The symbol of their invincible wealth, as they thought, was to be built in the shadow of the House of Greenspan. It would be built with the blood and sweat of Joe public long disdained and exploited by the Lords of the Street. This time they would build the Tower with the temptation of excessive mortgage loans in an “irrationally exuberant” real estate market.

According to the Lords of the Street, a new paradigm had emerged: financial risk could be sliced and diced into oblivion, cheap leverage was here to stay and housing prices would only go up. Many foresaw the folly of this enterprise. Buffet, the great chief of the House of Berkshire Hathaway, called the new instruments of invincible wealth, financial weapons of mass destruction. But the aging House of Greenspan was oblivious to the great folly unfolding before its jaundiced eye. The unbelievers were admonished to stay in Nebraska where they belonged.


Their Punishment

Finally, the Market decided to punish the arrogance of the bankers by destroying the tower. First, it, confused them by splitting them up into many greedy tribes, each with a tongue and agenda of its own, (hence the name Babel, meaning “confusion”). A new tribe, the Shorts, arrived and the hunters soon became the hunted. Alas, they were forced to subjugate their vast pools of CDOs and CDSs to the divine force of the Market. This ultimate humiliation came to be known as the “great MTM slaughter.”

When this happened, the Tower had to be abandoned. The various bankers would migrate in different directions. Many were fired. Others headed West to the the Valley of Silicon, no doubt dreaming of other Babels ripe for exploitation—nanotech, infotech, biotech and cleantech to name but a few

The Tower itself was partly burned and partly swallowed by the great Houses of Morgan, BOA and the Fed, under the wise and knowing protection of Benjamin B, the new master of the House of Greenspan, who would later come to be known as “Father Moral Hazard”.


(Adapted by WilliamBanzai7 from the Biblical story of the Tower of Babel)

2008 Sep 22 02:46 AM