The Ever-Changing Face of Wall Street01-21-2009 |
Many thought that the abolishment of the Glass-Steagall act in 1999, which essentially allowed investment and deposit banking businesses to join forces, would change the face of Wall Street forever. While it did present great changes to the worlds of commercial banking and investment banking, I would argue that the aftermath of the credit crisis of 2008 will have far greater ramifications on the way in which Wall Street operates in the future.
To start, the five biggest U.S. investment banks no longer exist in their pre-crisis structures. Bear Stearns is now part of JP Morgan and Lehman Brothers has filed for bankruptcy protection. Merrill Lynch is now part of Bank of America and Goldman Sachs and Morgan Stanley have recast themselves as bank holding companies. In so doing, Goldman and Morgan will be able to offer Federal Reserve Deposit Insurance (“FDIC”), have access to the Federal Reserve Bank Discount Window and have expanded their potential funding channels.
On the flip side, their new corporate structures will also expose Goldman and Morgan to new levels of regulation and supervision that should result in a lower overall risk profile. Remember, on Wall Street, risk drives return and as risk profiles are reduced, the ability to achieve some of the historical returns that these Firms have realized in the past will likely diminish as well. It will also expose the balance sheets of commercial banks to elements of risk, even if lessened, normally not associated with the historically stable deposit taking business of commercial banking. This was one of the things that Glass-Steagall was trying to prevent when the act was originally put into place back in 1933.
Despite the rush of investment firms to either align with banking counterparts or become bank holding companies themselves just four months ago, it now appears that some believe that this financial supermarket concept, as described above, may not work in this challenging market environment. Citigroup can be counted in this group as evidenced by their reported deal to sell a majority of its Smith Barney brokerage unit to Morgan Stanley while returning their focus to more traditional banking businesses. I believe that this is more indicative of Citigroup’s liquidity position than an overall trend reversal across the financial supermarkets and further believe that those that break apart their diversified financial services businesses now will likely look to assemble these pieces back together in years to come.
Regardless, Wall Street did change dramatically in 2008, continues to change in 2009 and will likely change again in the future.