“If only, America’s financial authorities must feel, they could gag congressmen as easily as they have muzzled short-sellers,” said Economist.com. Early this week market confidence was dented by political wrangling over the $700bn fund to buy up banks’ toxic mortgage-related assets, despite the risk of financial meltdown and a severe recession in America if the plan is blocked. Meanwhile, Japanese banks moved in on the US and the last two large independent investment banks disappeared. It’s “the end of Wall Street as we know it”, said The Wall Street Journal.
The demise of investment banks
Morgan Stanley and Goldman Sachs have turned themselves into bank holding companies, giving up their status as independent securities firms. The era of investment banks being “largely unregulated, highly-leveraged hedge funds” is over, said Jeremy Warner in The Independent. They will now be subject to the tighter regulation and capital requirements of commercial banks. They won’t be allowed to take on nearly as much leverage, which implies less risk and lower profits. In return, they can take deposits from the public, allaying fears over the extent to which they rely on wholesale funding. Given the recent turmoil at pure investment banks, forcible deleveraging would have happened anyway, said the FT: the banks “beat the authorities to it”.
Buyers move in
Meanwhile, “Japanese banks are back”, as David Wighton put it in The Times. Mitsubishi UFJ has bought 20% of Morgan Stanley for $9bn, while Nomura has scooped up Lehman’s Asian and European operations. Until recently, Japan’s financial sector was busy rebuilding domestic operations after the bad loan crisis. Now, though, with plenty of money – as they have come through the credit crisis largely unscathed and there is little use for their capital at home (domestic corporate lending has remained subdued) – they “can afford to do a little empire-building”, said Michiyo Nakamato in the FT.
The same goes for cash-rich Warren Buffett, who this week beefed up Goldman’s capital by buying $5bn of preferred stock in a private offering; he also received warrants enabling a purchase of another $5bn in common stock. Still, as Robert Peston noted on BBC.co.uk, this isn’t a vote of confidence in the US investment banking system. He demanded a 10% dividend, which means he sees Goldman as a “high-risk” investment. Goldman would have to pay a 10% premium to buy him out; meanwhile, the warrant on the common stock can be exercised at any point within the next five years. Goldman, said Peston, has “had its pocket picked”.