Skip to main content

Goldman, Morgan, & Paulson's big plan

Last night's surprise announcement that investment banks Goldman Sachs and Morgan Stanley were changing their status to bank holding companies marks the end of an era for big Wall Street investment banks.

As mentioned last week in, "The end of the broker-dealers?", Goldman and Morgan were, at that time, the last two survivors of the "big five" independent Wall Street investment banks.

Even before Lehman Brothers had filed for bankruptcy and Merrill Lynch was swooped up by Bank of America, some, like Nouriel Roubini, had said that the broker/dealer business model was flawed and doomed to failure.

Now that the last two major independent investment banks have restructured themselves as Fed-regulated banks, it seems that the end of the independent broker dealers has come about quicker than many of us might have imagined.

More on this from Bloomberg:

"The Wall Street that shaped the financial world for two decades ended last night, when Goldman Sachs Group Inc. and Morgan Stanley concluded there is no future in remaining investment banks now that investors have determined the model is 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.'' "

But here's the really interesting feature of this development: it not only helps Goldman and Morgan to stay afloat (by extendeding access to the Fed's discount lending window), it also puts the two banks in a position to buy up other failing banks in a "roll-up strategy".

Quotes from the NY Times Dealbook blog:

"By becoming bank holding companies, Goldman Sachs and Morgan Stanley gained some breathing room in the immediate term. But the change also may lay the groundwork for additional deal making. Given the number of bank failures expected this year, it is possible that Goldman and Morgan Stanley could seek to buy those banks cheaply in a “roll-up” strategy.

Before the move to make the two investment banks into holding banks, federal regulations prohibited them from pursuing such deals. Indeed, Morgan Stanley’s recent talks with Wachovia revolved around Wachovia buying Morgan Stanley."

We know that more bank failures are coming down the pike. Now Goldman and Morgan, having been thrown a lifeline by the Federal Reserve, are also in a position to bulk up from the acquisition of banks that won't be saved from failure. Interesting...

Also, reading through some of the comments at the Dealbook blog, it's apparent that many are wondering how Hank Paulson's connections to Goldman Sachs have influenced this latest "save" of troubled financial institutions.

For the more cynical among us, here's one trader's take on how Hank Paulson has personally benefited from taking on the position of US Treasury secretary (it involves his Goldman stock holdings).

Speaking of the Treasury secretary, we should also mention that despite all the latest news and rumination on Paulson's big plan to have the Treasury take on $700 billion or so in "troubled assets" from financial institutions' balance sheets, no one knows exactly how much all this will cost taxpayers in the end.

But as the FT reports, It will help push us towards our first trillion-dollar deficit:

"On top of a string of unprecedented events stemming from the credit crunch, the US Treasury’s $700bn rescue plan for distressed mortgage assets seems likely to give us another: the trillion-dollar deficit.

The long-term cost – or even profit – of the operations being launched in Washington depends on a number of known unknowns and possibly some unknown unknowns as well. But whatever the final cost to American taxpayers will be, they are now directly or indirectly providing a backstop for assets worth a great deal more than the federal government’s current $5,400bn (£2,950bn, €3,750bn) in debt."

For now, let me just say that I agree with others who have noted the likely indirect costs we will all suffer due to heightened inflation risk and increased moral hazard resulting from these bailouts and intervention schemes.

And if you don't like it, you can do as Mish suggests and notify your Senator today to register your displeasure with bailout actions and the proposed "dictatorial powers" for Paulson and Bernanke.

Popular posts from this blog

Seth Klarman: Margin of Safety (pdf)

Welcome, readers! Signup for free email updates at the Finance Trends Newsletter . Update: PDF links removed due to DMCA notice. Please see our extensive Klarman book notes below. New visitors, please check the Finance Trends home page for all new posts. Here's something for anyone who has been trying to get a look at Seth Klarman's now famous, and out of print, 1991 investment book, Margin of Safety .  My knowledge of value investing is pretty much limited to what I've read in Ben Graham's The Intelligent Investor (the book which originally popularized the investment concept of a "Margin of Safety"), so check out the wisdom from Seth Klarman and other investing greats in our related posts below. You can also go straight to Ronald Redfield's Margin of Safety book notes .    Related posts: 1. Seth Klarman interviews and Margin of Safety notes     2. Seth Klarman: Lessons from 2008 3. Investing Lessons from Sir John Templeton 4.

Slate profiles Victor Niederhoffer

Slate's recent profile of writer/speculator, Vic Niederhoffer has been getting some attention from traders and finance types in recent days. I thought we'd take a look at it here too, to offer up some possible educational value from Vic's experiences with trading and loss. Here's an excerpt from Slate's profile of Victor Niederhoffer : " I've enjoyed getting your e-mails. It sounds like you've thought a lot about being wrong. Well, the reason you contacted me, to call a spade a spade, is that I'm sort of infamous for having made a big, notorious, terrible error not once but twice in my market career. Let's talk about those errors. The first was your investment in the Thai baht, which pretty much wiped you out when the Thai stock market crashed in 1997. I made so many errors there it's pathetic. I made one of my favorite errors: "The mouse with one hole is quickly cornered." That is key. There are certain decisions you make in li

Clean Money - John Rubino: Book review

Clean Money by John Rubino 274 pages. Hoboken, New Jersey John Wiley & Sons. 2009. 1st Edition. The bouyant stock market environment of the past several years is gone, and the financial wreckage of 2008 is still sharp in our minds as a new year starts to unfold. Given the recent across-the-board-declines in global stock markets (and most asset classes) that have left many investors shell-shocked, you might wonder if there is any good reason to consider the merits of a hot new investment theme, such as clean energy. However, we shouldn't be too hasty to write off all future stock investments. After all, the market declines of 2008 may continue into 2009, but they may also leave interesting investment opportunities in their wake. Which brings us to the subject of this review. John Rubino, author and editor of , recently released a new book on renewable energy and clean-tech investing entitled, Clean Money: Picking Winners in the Green Tech Boom . In Clean