TOPICS > Economy

Goldman, Morgan Shift Operations as Wall Street Reels

September 22, 2008 at 6:25 PM EDT
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Goldman Sachs and Morgan Stanley's conversion into bank holding companies signaled the end of the investment bank model synonymous with Wall Street. Andrew Ross Sorkin of The New York Times details the changes on Wall Street and the impact of government bailouts on the marketplace.

GWEN IFILL: Next, the continued reshaping of Wall Street. Jeffrey Brown has that story.

JEFFREY BROWN: The end of an era came last night with the announcement that the last two major investment banking firms, Morgan Stanley and Goldman Sachs, would convert themselves into bank holding companies.

Andrew Ross Sorkin is covering that part of the financial crisis story for the New York Times. He’s also the editor of Deal Box, the paper’s business blog.

So, Andrew, why did this happen? Was there finally a sense that it had come down to changing the business or not surviving?

ANDREW ROSS SORKIN, New York Times: I think we were really at the precipice. And when you look at what Goldman and Morgan were up against, they were the next two dominos, if you will, to fall, to falter.

And I think really this is a tacit acknowledgment that the old model of Wall Street, at least as we know it — and what I mean by that is the investment banking model of effectively trading, what they call proprietary trading, almost like a hedge fund, using your own money to make huge bets, oftentimes with lots of leverage on top of that, wasn’t going to work in this world anymore.

And going forward, what they really needed was a cushion. And that’s what commercial banks have historically had. They’ve had that cushion, those deposits from you and myself and all those people who use ATM machines, and that has made them, at least in this environment, the safe haven.

Changes for investment banks

JEFFREY BROWN: So that's the -- the theory is that this will help shore them up. But you're saying it's because of the deposits?

ANDREW ROSS SORKIN: Well, that's what -- that's what may -- that's what may shore them up in the short term. But I think in the larger story here is that investment banking, as you and I have known it for so many years, is really going away.

You know, the kind of -- the culture of Wall Street, the lavish bonuses, the amount of money people have made over the years isn't going to happen anymore. It really is a very, very different world.

And to tell you that something radical has happened overnight, I know it just sounds like you're going from a, you know, an investment bank to a bank holding company, which doesn't sound like a -- it sounds like a distinction without a difference, but it really is something quite meaningful.

And going forward, I think what you're going to see out of Goldman Sachs and Morgan Stanley is they are going to become goliaths in the same way you think of Citigroup, or JPMorgan, or Bank of America, all of those firms commercial banks, bank holding companies, if you will, that have huge amounts of deposits that have made them in this environment, as I said before, considered safer havens.

JEFFREY BROWN: But in exchange for this kind of a change, they subject themselves to a new regulatory system. So explain how that's going to affect their business?

ANDREW ROSS SORKIN: Well, absolutely. You know, when you think about what -- the distinction without a difference, the distinction actually is with the difference. The distinction between an investment bank and commercial bank is huge.

Commercial banks historically have been regulated quite highly, in part because they've had access to the discount window and all sorts of other benefits that they've had from the government.

Now, one of the things for so many years is that the investment banks have said, "No, no, no. We don't want this. We don't want to be regulated."

But, you know, one of the things that's really going to happen is what we were talking about before, the change with leverage. Regulators are going to say, "You can't lever yourself up, you know, for every dollar you put in, you can borrow an additional $30," which is, frankly, what Goldman Sachs and Morgan Stanley were doing for so many years and, frankly, that's how they created such large profits.

JEFFREY BROWN: They have to have more capital -- they have to have more capital on hand, right?

ANDREW ROSS SORKIN: That's exactly right. But what that means is that the profits come down. The profit margins come down. Those seven-figure bonuses that had been handed out to midlevel executives just won't exist anymore.

And it really, I think, is going to change the fundamental nature of what you think an investment banker is.

Reducing company risk

JEFFREY BROWN: Now, so the profits come down, but in theory so does the risk, at least that's the idea?

ANDREW ROSS SORKIN: That is the idea.

JEFFREY BROWN: Now, Morgan Stanley also announced today that -- it was a Japanese bank, Mitsubishi, was taking a 20 percent stake in it. Now, that's part of it -- again, these banks, these investment banks having to shore up their capital, right?

ANDREW ROSS SORKIN: That's exactly what this is about. You know, when you think about the Japanese coming in and giving them, you know, taking up 20 percent of the capital base, that's really huge.

Last week, if you watched Morgan Stanley's stock price, it plunged. People stopped trading with them. There stopped being a belief, a confidence that this company was going to survive going forward.

And so, if you put the investment by the Japanese, and on top of that what the government is doing at the Fed, and turning them into a bank holding company, I think they -- this is saying that the government and the Japanese mean this company is not going to fail. That's what this is really about.

Bailout causes market 'jitters'

JEFFREY BROWN: How quickly can the kind of changes we're talking about happen?

ANDREW ROSS SORKIN: You know, when you think about the changes, they're probably going to happen over the course of about 24 months, two years. What has to happen is an enormous amount of regulatory effort that's going to take place, obligations that the banks are going to have.

And it really is a transformation that is going to take some period of time. But, in the end, it probably will take about two years. And I think, when you watch Wall Street over the next two years, we're going to really see a huge distinction, you know, if we have this conversation in 2010, we're going to be talking about a very different place.

JEFFREY BROWN: All right, let me ask you, just in our last minute, not about two years from now, but just about today, because the jitters continued on Wall Street today, a drop of 370 points, the price of oil, the biggest gain ever. What was going on? What were people telling you?

ANDREW ROSS SORKIN: Well, I think there were two things going on, one is that this $700 billion bailout actually, in many ways, is pushing the price of oil up, because people are saying, "Where are we going to get this money from?" And that's devaluing the dollar. And so I think that is putting a lot of jitters into the market.

And then the other side of this is that I think there's lots of questions still in the marketplace about whether the $700 billion deal gets done, how it gets done, what structure it takes. And all of the euphoria on Friday, I think people took the weekend, started thinking about it, and it didn't look as euphoric as it did on Friday afternoon.

JEFFREY BROWN: All right, Andrew Ross Sorkin. I misnamed your blog at the paper. It's DealBook. Sorry about that.


JEFFREY BROWN: Thanks for joining us.