I-Banks' Collapse: Core Deposits 1, Masters of the Universe 0

On Monday the American financial landscape changed forever, as the last of the major investment banks, Morgan Stanley and Goldman Sachs, finally succumbed to the opium of wholesale funding.

And not a moment too soon. As I’ve so proclaimed for 20 years -- often to loud derision -- the true value of any financial institution is its funding base. Warren Buffett himself often says the true value of Berkshire Hathaway is its access to the low-cost float its insurance units provide.

Now that the wholesale-funded model has blown up once and for all, its flaws are obvious. I don’t care how innovative your business model is, do you really want to finance it via overnight wholesale funding that might disappear on a moment’s notice?  And if you did fund your business that way, would you really leverage it up to its eyeballs? And then would you take all that short-term borrowed money and invest it in long-duration assets of unknown value?

Of course not. Now the whole world knows that not only did the emperor not have any  clothes, but that his closet was empty for years. All the purported masters of the universe were doing was engaging in a massive Ponzi funding scheme, which they could carry off because they lacked effective oversight.

Now that the investment banks have had their inevitable crackup, the Federal Reserve snaps its fingers and allows them to become banks in a single day.

I call foul. The old tradeoff worked like this: commercial banks traded some of the upside for the stability of funding that federal deposit insurance provided. Investment banks, operating outside the feds’ purview, gambled for higher returns, in return for the higher risk of uncertain funding. Now they’re supposed to get both the upside and government protection? Someone please explain to me how that makes sense.

Will the commercial banks, with their stable core deposits and subject to endless regulation, emerge as the big winners, or will the feds allow the investment banks to go back to their old shenanigans and game the system once again? I know what the right answer should be.