Goldman Sachs and Morgan Stanley are Now "Banks"

By Dr. Duru written for One-Twenty

September 21, 2008


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The Federal Reserve just made an important announcement tonight (9:30pm EDT): "The Federal Reserve Board on Sunday approved, pending a statutory five-day antitrust waiting period, the applications of Goldman Sachs and Morgan Stanley to become bank holding companies."

Goldman Sachs (GS) and Morgan Stanley (MS) were the last two major investment banks left standing amidst the chaos. I can only assume that this transformation paves the way for the Federal Reserve to provide more direct assistance to GS and MS. It also allows the government to more tightly regulate these companies. More regulation will certainly mean less risk-taking and lower profits. The high-octane business model of using leverage to super-charge profits should end. 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 on October 2, 2008. I would post charts and speculate on what the technicals hold, but I do not think technicals matter as much when the rules of the game are subject to change at any time at the whim of the government.

I post the rest of the Federal Reserve's statement below. The Fed is fully committed to making sure these firms can function as normally as possible, all things considered:

"To provide increased liquidity support to these firms as they transition to managing their funding within a bank holding company structure, the Federal Reserve Board authorized the Federal Reserve Bank of New York to extend credit to the U.S. broker-dealer subsidiaries of Goldman Sachs and Morgan Stanley against all types of collateral that may be pledged at the Federal Reserve's primary credit facility for depository institutions or at the existing Primary Dealer Credit Facility (PDCF); the Federal Reserve has also made these collateral arrangements available to the broker-dealer subsidiary of Merrill Lynch. In addition, the Board also authorized the Federal Reserve Bank of New York to extend credit to the London-based broker-dealer subsidiaries of Goldman Sachs, Morgan Stanley, and Merrill Lynch against collateral that would be eligible to be pledged at the PDCF."

Be careful out there!

Full disclosure: No related positions. For other disclaimers click here.

DR. DURU®, 2008

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