The Independent Investment Banking Era Is Dead

Per a statement released by the Fed last night the independent Investment Banking era is dead:

From the Federal Reserve:

The Federal Reserve Board on Sunday approved, pending a statutory five-day antitrust waiting period, the applications of Goldman Sachs (GS) and Morgan Stanley (MS) to become bank holding companies.

To provide increased liquidity support to these firms as they transition to managing their funding within a bank holding company structure, the Federal Reserve Board authorized the Federal Reserve Bank of New York to extend credit to the U.S. broker-dealer subsidiaries of Goldman Sachs and Morgan Stanley against all types of collateral that may be pledged at the Federal Reserve’s primary credit facility for depository institutions or at the existing Primary Dealer Credit Facility (PDCF); the Federal Reserve has also made these collateral arrangements available to the broker-dealer subsidiary of Merrill Lynch. In addition, the Board also authorized the Federal Reserve Bank of New York to extend credit to the London-based broker-dealer subsidiaries of Goldman Sachs, Morgan Stanley, and Merrill Lynch against collateral that would be eligible to be pledged at the PDCF.

The above was followed very quickly by another press release announcing that the Goldman and Morgan transactions could proceed immediately without the five day waiting period:

From the Federal Reserve:

Based on consultation with the Department of Justice regarding the applications of Goldman Sachs and Morgan Stanley to become bank holding companies, the Federal Reserve Board announced on Monday that the transactions may be consummated immediately without the application of the five-day antitrust waiting period.

Methinks that the government and the I-Banks in question more or less colluded on this one in order to ensure that Goldman and Morgan were as stable and safe as possible.

Overall this means that the era of light regulation, cheap money policy/low interest rates, financial innovations, etc, which saw the rise in subprime lending, derivatives trading, mortgage securities/CDOs, etc, etc, has destroyed the financial world as we once knew it. Around this time last year we were dealing with the shuttering of small mortgage lenders, “surprise” losses being reported by some of the banks and the beginning of the write down era, and now we’re facing the complete restructuring of the financial sector and a world of banking that will never be the same.

Both the Fed and the Treasury have attempted to intervene in the markets in ways that were supposed to improve things, mitigate the damage, ease the pain, etc, and yet here we are. Might it be that they’re focusing on symptoms and not the core problems, on top of not accepting that certain things (like the very necessary housing price correction) need to be allowed to run their course?

You can read the official order approving the formation of Goldman Sachs as a Bank Holding Company here(PDF File), and the official order for Morgan Stanley here(PDF File). You can also find FT coverage of the subject here.

Sources:

The Federal Reserve : “2008 Banking and Consumer Regulatory Policy” — September 21, 2008.

The Federal Reserve : “2008 Banking and Consumer Regulatory Policy” — September 22, 2008.

Disclosure: at the time of publishing the author didn’t own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn’t be viewed as financial or investment advice.

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