The Wall Street that shaped the financial world for two decades ended last night, when Goldman Sachs Group Inc and Morgan Stanley concluded there was no future in remaining investment banks now that investors had determined the model was broken.
The Federal Reserve’s approval of their bid to become banks ends the ascendancy of the securities firms, 75 years after Congress separated them from deposit-taking lenders, and caps weeks of chaos that sent Lehman Brothers Holdings Inc into bankruptcy and led to the rushed sale of Merrill Lynch & Co to Bank of America Corp.
“The decision marks the end of Wall Street as we have known it,” said William Isaac, a former chairman of the Federal Deposit Insurance Corp. “It’s too bad.”
Goldman, whose alumni include Henry Paulson, the Treasury Secretary presiding over a $700-billion bank bailout, and Morgan Stanley, a product of the 1933 Glass-Steagall Act that cleaved investment and commercial banks, insisted they didn’t need to change course, even as their shares plunged and their borrowing costs soared last week.
By then, it was too late. As financial markets gyrated — the Dow Jones Industrial Average whipsawed 1,000 points in the week’s last two days — and clients defected, executives at the two firms concluded they had no choice. The Federal Reserve Board met at 9 pm yesterday and considered applications delivered that day, said Michelle Smith, a spokeswoman for the central bank. The decision was unanimous, she said.
“There’s blood in the water in the industry and the sharks are circling,” Peter Kovalski, who helps oversee about $10 billion at Alpine Woods Capital Investors LLC, said at the end of last week. “It all comes down to perception and the current trust within the community.”
Morgan Stanley rose $2.58, or 9.5 per cent, to $29.79 as of 12:25 pm in New York Stock Exchange composite trading. Goldman advanced 10 cents to $129.90.
Wall Street hasn’t had such a shake-up since the 1980s, when firms including Morgan Stanley and Bear Stearns Cos went public and London’s financial markets were altered forever with the so-called Big Bang reforms implemented in 1986. Bear Stearns disappeared in March, when it was bought by JPMorgan Chase & Co.
The announcement paves the way for the two New York-based firms, both of which will now be regulated by the Fed, to build their deposit base, potentially through acquisitions. That will allow them to rely more heavily on deposits from retail customers instead of using borrowed money — the leverage that led to the undoing of Bear Stearns and Lehman.
