And Then There Were None

As the Fed is rushing to pass the 700 billion bailout in Congress, the last remaining 2 investment banks Goldman Sachs and Morgan Stanley have been transformed into bank holding companies. This completes the decimation of the good old investment banking model and re-writes wall street as we know it.

Well, what this mean for Goldman and Morgan - they will be able to begin taking deposits like traditional banks which will increase their cash balances. In return they will be subject to far greater regulations and look more like commercial banks. They will also need to hold higher capital reserves and take less risks. And in return to subjecting themselves to more regulation, they will get full access to the Fed's lending facilities and discount windows which should help them avoid a Lehman like situation.

As bank holding companies, the two banks 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. They are both highly leveraged compared to traditional banks. Today, Goldman Sachs has $1 of capital for every $22 of assets; Morgan Stanley has $1 for every $30. This will have to come down for both. By contrast, Bank of America's has less than $11 for every $1 of capital.

So, now that the stocks of GS and MS will trade like banks, are they really worth $130 and $27, respectively? I doubt it. But we might not know what the market really thinks about all this until the ban on short-selling is lifted.