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And Then There Were None


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

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 ??aximum flexibility and stability to pursue new business opportunities as the financial marketplace undergoes rapid and profound changes.?

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.


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