In what may be the defining moment of banking in America, Morgan Stanley and Goldman Sachs- the last of the two largest surviving banks in America decided to abandon all investments and become bank holding companies in order to remain in business.If after the fall of Lehmann Brothers and the buy out of Merrill Lynch you thought that the financial crisis being faced by the American banks was over, here comes another bombshell. The Federal Reserve in America granted permission to two of the largest banks Morgan Stanley and Goldman Sachs to drop the word ‘I’ from their operations. The two banks will now return to the more old fashioned style of banking. This change of status implies that both the banks will now come under the regulation of the Federal Reserve. And hence they will have to face the same regulations that other commercial banks face as opposed to the regulations that they had to face when they were under the Securities and Exchange Commission.
But the step taken by the two banks is being lauded all across the world for it is the safest option in such times of turmoil. The Americans are in the midst of a subprime mortgage crisis which started more than a year back and this is the crisis that swallowed the likes of Lehmann brothers as well as Merrill Lynch, though AIG was bailed out by the American government. The move will ensure that both the banks get to build up cash and deposits and even go forth and buy smaller banks. As an investment bank, the two had continually relied on borrowed money rather than just deposits but in the current financial crisis that the country is facing right now, borrowing money is not all that easy. The move also means stricter regulations from the Federal Reserve, something, that the two banks may not be used to. Hence they will have a certain amount of capital and will also not be free to sell and buy securities as they used to when they had the status of investment banks.
Meanwhile Morgan Stanley is in talks with Mitsubishi UFJ Financial Group, Japan’s largest bank, to acquire a stake in it. It is expected that there will be an agreement signed that offers a stake of almost twenty percent of Morgan Stanley to Mitsubishi UFJ Financial Group. The move was taken well by the Market as the shares of Morgan Stanley rose by 3.5 %.
Meanwhile, it is expected that Japan’s largest brokerage Nomura Holdings will be buying Lehman’s Asian assets whereas Britain’s largest bank Barclay’s will be purchasing Lehman brothers North American brokerage operations.
Meanwhile the mood on Wall Street is still somber as these were two of the biggest names in the financial market not just in America but also in other parts of the world. The investments made by the two banks in the last two years were erroneous and now have had to pay by giving up their pride. Meanwhile the smaller investment banks that can wither the financial storm right now may be able to cope up with the crisis. But from the point of view of the two banks as well as the American economy, it was indeed a pleasant move to abandon all investments. The banks will now be able to concentrate on orthodox retail commercial banking and should be able to build on it. Moreover in the financial turmoil being currently faced by the country, it will bring in stability and safety. The two major banks may have lost their pride but at least are still standing to be able to recover in the future.