Monday, September 22, 2008


Goldman Sachs (GS) and Morgan Stanley (MS) are the final two major independent i-banks to leave their status as I-banks and become bank holding companies (BHC's).

I did mention in my previous newsletter that without consumer deposits, investment banks face considerable pressure in the condition that they are in. This is the reason why Bank of America (BAC), JP Morgan (JPM), Citigroup (C), Wachovia (WB), and Taunus Corp., collectively the top 5 largest BHC's, have all been able to survive.

A BHC must directly or indirectly own or control 25% or more of a U.S. bank.

Under Regulation Y, GS and MS are now under the Federal Reserve's supervision, increasing regulatory oversight as well as reducing the amount of debt these two firms can take on in the future.

From the NYTimes: In its statement, Goldman said that it would become the nation’s fourth-largest bank holding company, with its small existing deposit-taking units to be rolled into GS Bank USA. Morgan Stanley will convert its Utah industrial bank into a deposit-taking national bank, to be called Morgan Stanley Bank.

Typically, new or smaller banks adopt BHC status due to its flexibility, allowing the BHC's to easily raise capital, issue stock, and acquire banks and other entities more so than I-banks.
The chance of failure for GS and MS are very slim given the additional backing from the Federal Reserve. Therefore, the WB-MS deal may not even be considered.

Here's the best article (NYTimes) on the details following the announcement so far:

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