from nytimes.com
September 23, 2008
Starting a New Era at Goldman and Morgan
By BEN WHITE
The transformation of Wall Street picked up pace on Monday as Goldman Sachs and Morgan Stanley, the last big independent investment banks, moved to restructure into larger, less risk-taking organizations that will be subject to far greater regulation by the Federal Reserve.
The changes came after Goldman and Morgan Stanley on Sunday night received permission from the Federal Reserve to become bank holding companies. The change means they will be able finance their activities with insured deposits but in return must reduce the amount they can borrow to make the kind of big trading bets that drove huge profits, and massive bonuses for executives, over the last several years of Wall Street’s latest Gilded Age.
Morgan Stanley moved quickly into the new era on Monday, announcing that it planned to sell up to a 20 percent stake in itself to Mitsubishi UFJ Financial Group, Japan’s largest commercial bank, for about $8 billion. Mitsubishi has $1.1 trillion in bank deposits, which will help bolster Morgan’s stability of financing. Goldman Sachs is also expected to move to increase its deposit base and add more capital to its balance sheet.
The changes by Morgan Stanley and Goldman essentially bring to an end the era of the big, independent Wall Street investment bank and a return to the model that dominated before the Glass-Steagall Act of 1933 forbade commercial banks from also owning securities firms.
Both banks said they requested the change in their status. But the changes also closely follow comments from executives at both investment houses saying their business model was not broken and that transforming into deposit-funded commercial banks would not necessarily help them perform better. This raised the question of whether the change was really voluntary, which both banks insist it was, or was mandated by a Federal Reserve eager not to have to come to the rescue of another flailing financial institution.
The changes, which came as Congress and the Bush administration rushed to pass a $700 billion rescue of financial firms, amount to a blunt acknowledgment that their model of finance and investing had become too risky and that they needed the cushion of bank deposits that had kept big commercial banks like Bank of America and JPMorgan Chase relatively safe amid the recent turmoil.
It also is a turning point for the high-rolling culture of Wall Street, with its seven-figure bonuses and lavish perks for even midlevel executives.
Commercial banks tend to produce both more modest profits and payouts to top executives.
“The kind of bonuses you saw on Wall Street over the last five years are not something you are likely to ever see again, not in our lifetime,” said Charles Geisst, a Wall Street historian and professor at Manhattan College.
By becoming bank holding companies, Morgan Stanley and Goldman are agreeing to significantly tighter regulations and much closer supervision by bank examiners from several government agencies rather than only the Securities and Exchange Commission. Now, the firms will look more like commercial banks, with more disclosure, higher capital reserves and less risk-taking.
For decades, firms like Morgan Stanley and Goldman Sachs thrived by taking bold bets with their own money, often using enormous amounts of debt to increase their profits, with little outside oversight.
They were the envy of Wall Street, dominating the industry’s most lucrative businesses, landing headline-grabbing deals and advising companies and governments on mergers, stock offerings and restructurings.
But that brash model was torn apart over the last several weeks as investors lost confidence in the way they made those bets during the recent credit boom, when investment banks expanded with aplomb into esoteric securities, the risks of which were not easily understood.
Over several harrowing days, clients started pulling their money, share prices plunged and these banks’ entire enterprises were brought to the brink.
In exchange for subjecting themselves to more regulation, the companies will have access to the full array of the Federal Reserve’s lending facilities.
It should help them avoid the fate of Lehman Brothers, which filed for bankruptcy last week, and Bear Stearns and Merrill Lynch — both of which agreed to be acquired by big bank holding companies.
The decision by the banks to become a holding company also raises questions about whether the Federal Reserve will seek to regulate hedge funds, many of the largest of which closely resemble investment banks like Goldman.
Just a year ago investment banks, the titans of global finance, considered bank regulation a millstone to be avoided at all costs. Commercial banks have to subject themselves to restrictions on how much money they can borrow and what kinds of businesses they can be in. Lobbyists for firms like Goldman spent years fending off closer supervision of their business.
As bank holding companies, the two banks, whose shares have lost about half their value this year, will have to reduce the amount of money they can borrow relative to their capital.
That will make them more financially sound but will also significantly limit their profits. Today, both Goldman Sachs and Morgan Stanley have $1 of capital for every $22 of assets. By contrast, Bank of America’s has less than $11 for every $1 of capital.
JPMorgan Chase acquired Bear Stearns this spring in a fire sale brokered by the federal government, while Bank of America has agreed to buy Merrill Lynch for $50 billion.
As bank holding companies, Morgan and Goldman will have greater access to the discount window of the Federal Reserve, which banks can use to borrow money from the central bank. While they were allowed to draw on temporary Fed lending facilities in recent months, they could not borrow against the same wide array of collateral that commercial banks could. The discount window access for investment banks is expected to be phased out in January.
It will take time for Goldman and Morgan to transform into fully regulated banks because they cannot quickly reduce how much money they borrow relative to their assets. Both banks are likely to seek waivers from the Federal Reserve to give them time to comply with the capital requirements imposed on deposit-funded commercial banks.
The Fed and the Securities and Exchange Commission have had examiners at investment banks since March, giving regulators huge insight into their operations.
Both banks already have limited retail deposit-taking businesses, which they plan to expand over time. Morgan Stanley had $36 billion in retail deposits as of Aug. 31 and Goldman Sachs had $20 billion in deposits.
“We believe that Goldman Sachs, under Federal Reserve supervision, will be regarded as an even more secure institution with an exceptionally clean balance sheet and a greater diversity of funding sources,” Lloyd C.Blankfein, the chairman and chief executive of Goldman, said in a statement on Sunday night.
John J. Mack, the chairman and chief executive of Morgan Stanley, said: “This new bank holding structure will ensure that Morgan Stanley is in the strongest possible position — with the stability and flexibility to seize opportunities in the rapidly changing financial marketplace.”
In recent days, Morgan Stanley had sought other ways to bolster its capital and had been in advanced talks with China’s sovereign wealth fund and others about raising billions of dollars, people briefed on the matter said Sunday night. It had also been talking about a merger with Wachovia, a large commercial bank based in Charlotte, N.C.
With their transition to operating as bank holding companies, those talks are likely to take a different form, because now Morgan Stanley can buy a commercial bank.
How the mighty have fallen. This ends the era of Investment Banks and 30:1 leverage and brings us into a European model with a merging of deposit and investment banking where fractal banking ratios allow leverage of about 9:1. I still feel thats very high but its "manageable." About time.
Showing posts with label Wall Street. Show all posts
Showing posts with label Wall Street. Show all posts
Monday, September 22, 2008
Sunday, September 14, 2008
Hurricane Lehman
from nytimes.com
September 15, 2008
In Frantic Day, Wall Street Banks Teeter
By ANDREW ROSS SORKIN, BEN WHITE and JENNY ANDERSON
In one the most extraordinary days in Wall Street’s history, Merrill Lynch is near an 11th-hour deal with Bank of America to avert a deepening financial crisis while another storied securities firm, Lehman Brothers, hurtled toward liquidation, according to people briefed on the deal.
The dramatic turn of events was prompted by the cataclysm of losses that has shaken the American financial industry over the last 14 months.
The moves came after a weekend of frantic negotiations between federal officials and Wall Street executives over how to avert a downward spiral in the markets. Questions still remain about how the market will react and whether other firms may still falter like A.I.G., the large insurer, and Washington Mutual, both of whose stocks fell precipitously last week.
Coming just a week after the government took control of mortgage lenders Fannie Mae and Freddie Mac, the magnitude of the industry’s reshaping is staggering: two of the most powerful firms on Wall Street, Merrill Lynch and Lehman, will disappear.
The weekend’s once unthinkable outcome came after a series of emergency meetings at the Federal Reserve building in downtown Manhattan in which the fate of Lehman hung in the balance. In the meeting Federal Reserve officials and the leaders of major financial institutions were trying to complete a plan to rescue the stricken investment bank.
But as the weekend unfolded, Barclays and Bank of America, which had both considered buying all or part of Lehman, decided that they could not reach a deal without financial support from the federal government or other banks.
As a result, people briefed on the matter said late Sunday that Lehman Brothers would file for bankruptcy protection, in the largest failure of an investment bank since the collapse of Drexel Burnham Lambert 18 years ago.
Lehman will seek to place its parent company, Lehman Brothers Holdings, into bankruptcy protection, as its subsidiaries remain solvent while the parent firm liquidates, these people said. A consortium of banks will provide a financial backstop to help provide an orderly winding down of the 158-year-old investment bank. And the Federal Reserve has agreed to accept lower-quality assets in return for loans from the government.
Lehman has retained the law firm Weil, Gotshal & Manges. The firm’s restructuring head, Harvey Miller, also spearheaded Drexel’s bankruptcy filing in February 1990.
As efforts to acquire Lehman faltered, Bank of America turned to Merrill Lynch and offered at least $38.25 billion in stock for that investment bank, people briefed on the negotiations said. The deal, valued at $25 to $30 a share, could be announced as soon as Sunday night, these people said. Merrill shares closed at $17.05 on Friday.
Merrill’s chief executive, John A. Thain, and Kenneth D. Lewis, Bank of America’s chief executive, initiated talks on Saturday, prompted by the reality that a Lehman bankruptcy would ripple through Wall Street and further cripple Merrill Lynch, people briefed on the negotiations said.
Merrill’s 15,000 brokers will be combined with Bank of America’s smaller group of wealth advisers. The entity will be run by Robert McCann, the head of Merrill’s global wealth management business.
Mr. Fleming, Merrill’s president, will be president of the combined bank’s corporate and investment bank while Thomas Montag, a former Goldman executive who started at Merrill in August, will head all the merged company’s all risk, trading and institutional sales.
The leading proposal to rescue Lehman had been to divide the bank into two entities, a “good bank” and a “bad bank.” Under that last scenario, Barclays would have bought the parts of Lehman that have been performing well, while a group of 10 to 15 Wall Street companies would agree to absorb losses from the bank’s troubled assets, according to two people briefed on the proposal. Taxpayer money would not be included in such a deal, they said.
But that plan fell apart on Sunday, all but assuring that Lehman would be forced to liquidate.
The overarching goal of the weekend talks had been prevent a quick liquidation of Lehman, a bank that is so big and so interconnected with others that its abrupt failure would send shock waves through the financial world. Of deep concern is what impact a Lehman failure would have on other securities firms, insurance companies and banks, which have come under mounting pressure in the markets.
Even as Lehman and Merrill played out, the insurance company, the American International Group, was planning a major reorganization and a sale of its aircraft leasing business and other units to stabilize its finances, a person briefed on the company’s strategy said on Sunday.
A.I.G. became one of the focuses at an emergency gathering of Wall Street executives over the weekend, and was trying to arrange a capital infusion in the face of possible credit downgrades.
It was unclear whether A.I.G. would succeed in its capital search, but a person briefed on the discussions said it was seeking more than $40 billion even as it tried to sell assets to shore up its financial footing.
Among the businesses likely to be sold is A.I.G.’s aircraft leasing business, the International Lease Finance Corporation. Founded in 1973, the business has nearly 1,000 planes in its fleet.
Investors, afraid that A.I.G. would have to absorb further write-downs in its already damaged mortgage securities and collateralized debt obligations, have driven down the company’s shares in recent days. The stock closed Friday at $12.14 a share, a decline of 46 percent for the week.
Eric Dash, Louise Story and Michael de la Merced contributed reporting.
Hurricane Lehman is about to become a Category 5. Look out..... Hurricane Merrill might be downgraded to a tropical storm if BoA steps in. Historic days... Once in a century says Jester Gspan.
September 15, 2008
In Frantic Day, Wall Street Banks Teeter
By ANDREW ROSS SORKIN, BEN WHITE and JENNY ANDERSON
In one the most extraordinary days in Wall Street’s history, Merrill Lynch is near an 11th-hour deal with Bank of America to avert a deepening financial crisis while another storied securities firm, Lehman Brothers, hurtled toward liquidation, according to people briefed on the deal.
The dramatic turn of events was prompted by the cataclysm of losses that has shaken the American financial industry over the last 14 months.
The moves came after a weekend of frantic negotiations between federal officials and Wall Street executives over how to avert a downward spiral in the markets. Questions still remain about how the market will react and whether other firms may still falter like A.I.G., the large insurer, and Washington Mutual, both of whose stocks fell precipitously last week.
Coming just a week after the government took control of mortgage lenders Fannie Mae and Freddie Mac, the magnitude of the industry’s reshaping is staggering: two of the most powerful firms on Wall Street, Merrill Lynch and Lehman, will disappear.
The weekend’s once unthinkable outcome came after a series of emergency meetings at the Federal Reserve building in downtown Manhattan in which the fate of Lehman hung in the balance. In the meeting Federal Reserve officials and the leaders of major financial institutions were trying to complete a plan to rescue the stricken investment bank.
But as the weekend unfolded, Barclays and Bank of America, which had both considered buying all or part of Lehman, decided that they could not reach a deal without financial support from the federal government or other banks.
As a result, people briefed on the matter said late Sunday that Lehman Brothers would file for bankruptcy protection, in the largest failure of an investment bank since the collapse of Drexel Burnham Lambert 18 years ago.
Lehman will seek to place its parent company, Lehman Brothers Holdings, into bankruptcy protection, as its subsidiaries remain solvent while the parent firm liquidates, these people said. A consortium of banks will provide a financial backstop to help provide an orderly winding down of the 158-year-old investment bank. And the Federal Reserve has agreed to accept lower-quality assets in return for loans from the government.
Lehman has retained the law firm Weil, Gotshal & Manges. The firm’s restructuring head, Harvey Miller, also spearheaded Drexel’s bankruptcy filing in February 1990.
As efforts to acquire Lehman faltered, Bank of America turned to Merrill Lynch and offered at least $38.25 billion in stock for that investment bank, people briefed on the negotiations said. The deal, valued at $25 to $30 a share, could be announced as soon as Sunday night, these people said. Merrill shares closed at $17.05 on Friday.
Merrill’s chief executive, John A. Thain, and Kenneth D. Lewis, Bank of America’s chief executive, initiated talks on Saturday, prompted by the reality that a Lehman bankruptcy would ripple through Wall Street and further cripple Merrill Lynch, people briefed on the negotiations said.
Merrill’s 15,000 brokers will be combined with Bank of America’s smaller group of wealth advisers. The entity will be run by Robert McCann, the head of Merrill’s global wealth management business.
Mr. Fleming, Merrill’s president, will be president of the combined bank’s corporate and investment bank while Thomas Montag, a former Goldman executive who started at Merrill in August, will head all the merged company’s all risk, trading and institutional sales.
The leading proposal to rescue Lehman had been to divide the bank into two entities, a “good bank” and a “bad bank.” Under that last scenario, Barclays would have bought the parts of Lehman that have been performing well, while a group of 10 to 15 Wall Street companies would agree to absorb losses from the bank’s troubled assets, according to two people briefed on the proposal. Taxpayer money would not be included in such a deal, they said.
But that plan fell apart on Sunday, all but assuring that Lehman would be forced to liquidate.
The overarching goal of the weekend talks had been prevent a quick liquidation of Lehman, a bank that is so big and so interconnected with others that its abrupt failure would send shock waves through the financial world. Of deep concern is what impact a Lehman failure would have on other securities firms, insurance companies and banks, which have come under mounting pressure in the markets.
Even as Lehman and Merrill played out, the insurance company, the American International Group, was planning a major reorganization and a sale of its aircraft leasing business and other units to stabilize its finances, a person briefed on the company’s strategy said on Sunday.
A.I.G. became one of the focuses at an emergency gathering of Wall Street executives over the weekend, and was trying to arrange a capital infusion in the face of possible credit downgrades.
It was unclear whether A.I.G. would succeed in its capital search, but a person briefed on the discussions said it was seeking more than $40 billion even as it tried to sell assets to shore up its financial footing.
Among the businesses likely to be sold is A.I.G.’s aircraft leasing business, the International Lease Finance Corporation. Founded in 1973, the business has nearly 1,000 planes in its fleet.
Investors, afraid that A.I.G. would have to absorb further write-downs in its already damaged mortgage securities and collateralized debt obligations, have driven down the company’s shares in recent days. The stock closed Friday at $12.14 a share, a decline of 46 percent for the week.
Eric Dash, Louise Story and Michael de la Merced contributed reporting.
Hurricane Lehman is about to become a Category 5. Look out..... Hurricane Merrill might be downgraded to a tropical storm if BoA steps in. Historic days... Once in a century says Jester Gspan.
Subscribe to:
Posts (Atom)