The news that Goldman Sachs and Morgan Stanley are in the process of becoming Bank Holding Companies (BHCs) doesn't come as a complete surprise. If these firms were to remain independent, they had to radically reposition their balance sheets by bolstering capital and lengthening debt maturities. Further, the trend towards greater transparency is already afoot, so the kinds of disclosures required under the BHC Act were in the offing, anyway. Finally, by become a BHC you have access to the Fed window, access of some consequence given today's tumultuous market conditions. So by becoming a Bank (with a capital B) in the regulatory sense of the word, Goldman and Morgan Stanley are choosing life, with the chance of remaining independent. The question is - what kind of a life will it be?
One of the best things about being a Bank is the ability to take deposits. Few things are better in liability-land than core deposits, that sticky, low-cost source of financing that makes every other industry drool. Having deposits as part of the capital structure means that unless you screw things up pretty badly, you've got a stable, long-term source of funds to help support investment activities. But I have two questions when thinking about the former Houses of Goldman and Morgan Stanley becoming banks:
- Are they really going to take in core deposits and run branch networks?; and
- If so, is the FDIC (and, by extension, taxpayers) on the hook if the banking side of the house blows up?
Is the Glass (Steagall) Half Full or Half Empty?
In the topsy-turvy world of bailouts and rule changes, are the principles of Glass-Steagall gone forever? Is the FDIC effectively backstopping trading activities? If so, this is both wrong and terribly dangerous, yet another way of privatizing gains and socializing losses. If this is path the Fed, Treasury and Congress want to take (by having former bulge-bracket firms become BHCs), then I'd recommend very clear fire-walls between the banking and trading and deposit-taking sides of the house. If stock and bond holders buy paper in the Bank, and if trading does badly, they should suffer - not the taxpayer. Otherwise, we'll just be perpetuating the asymmetry between private investors and the U.S. taxpayer (heads I win, tails you lose).
But what of the "new" Goldman and Morgan Stanley's business activities? The cost of capital just skyrocketed because of forced de-leveraging, and by now becoming BHCs this deleveraging is a permanent state of affairs. They need to be much more capital efficient and to focus on high-margin businesses. Asset Management. Private wealth management. M&A advisory.
