And Then There Were None

Posted by: Theo Francis on September 22

The standalone investment bank died quietly Sunday, Sept. 22, 2008, after a brief but dramatic illness. It was 75 years old.

GS.gif On Sunday night, Goldman Sachs and Morgan Stanley said they would become bank holding companies, submitting to the authority and oversight of federal banking regulators. After the collapse of Bear Stearns, the bankruptcy filing of Lehman Brothers and the agreement by Merrill Lynch to be acquired by Bank of America, Goldman and Morgan were the last remaining investment banks. Goldman noted that the move would make it the fourth biggest bank holding company in the U.S. Morgan said it was seeking “maximum flexibility and stability to pursue new business opportunities as the financial marketplace undergoes rapid and profound changes.” MorganStanley.gif

The Fed said it had approved the switch, with allowances for a five-day waiting period to clear any anti-trust hurdles; the banks’ broker-dealer units, along with Merrill’s, will also be able to borrow from the New York Fed.

The move is likely to subject the companies to stricter regulation, requiring them to retain more capital and take fewer risks than they could as investment banks.

The announcement was made without much fanfare (as the New York Times said), and may also make regulatory reform somewhat easier for the next president and Congress. Instead of two kinds of regulated entities, they could well face the need to consider just one.

In many ways, the investment bank was a creature of the last great systemic shock to the U.S. financial system: the crash of 1929 and the Great Depression.

Stock-market speculation by commercial banks -- along with excessive risk-taking and bad loans to companies the banks had invested in -- were blamed for contributing to a wave of bank failures in the depths of the Depression. One result was, in 1933, the bill eventually named after Sen. Carter Glass (an architect of the Federal Reserve) and Rep. Henry Bascom Steagall -- the House Banking and Currency Committee's chairman, whose main condition involved deposit insurance. It forced financial firms to choose between banking and the securities business. Never again, the idea went, would rampant risk-taking in the securities market endanger such a vital cog in the commerce of the nation as the banking system.

Much of that barrier, of course, came tumbling down in the name of deregulation with the Gramm-Leach-Bliley Act, in 1999, broke down much of the barrier Glass-Steagall had established. But the investment banks survived, and certainly appeared to thrive, for nearly another decade.

Reader Comments

Aline

September 22, 2008 01:24 PM

Outro artigo interesting...Beijos

Reality

September 22, 2008 03:40 PM

So, with this development, it looks like there is another 1929 catastrophe in the making.

Good for us. We live in bubbles.

Tyrone

September 22, 2008 03:43 PM

Good riddance.

But be aware....
Soon you will find these white collar ruffians at your local bank, pushing you another one of their dodgy financial instrument. Earlier they skivied off the rich, now the poor will also be fair game for them.

Paul

September 22, 2008 04:10 PM

I don't have any mercy with investment banks. For decades they have been playing extremely rude and dangerous games in the derivatives markets, while they were ripping the faces off their customers (victims) and horded obscene amounts of profits. Now their magic money machine has hit themselves and they ought to face the consequences.
Unfortunately, again it is the victims who have to bleed and pay. Bailout by the taxpayer is the most socialist way to do it, while the bankers have cashed out millions in private profits.
I urgently recommend reading insider books like F.I.A.S.C.O by Frank Partnoy to get an idea about how greedy incentives can turn humans into money vampires.

Kumar D Kapasi

September 22, 2008 04:25 PM

The demise of the Investment Bank is like the demise of the leader of a nation accused of possessing the weapons of mass destruction. And, as in the case of that leader, most people will rejoice the demise.

Let us now all pray for the (a) return of sanity; (b) purging of the greed; (c) stringent regulatory oversight; (c) stability and gradual rise of the markets; and (d) recovery and peaceful progress of all those who survived the flagrant violation of and heartless disrespect to, human, moral and ethical values by both, that leader and the Investment Bank. AMEN....!!!

Dumbiste

September 22, 2008 04:44 PM

Shrewd move! Now they will be deemed 'too big to fail'. They can screw up and our government will come to their rescue... We and our kids are going to pay the bills...

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