The End of an Era

This evening’s announcement that Goldman Sachs and Morgan Stanley will become bank holding companies and thus cease being investment banks ends the era of banking that dates back to 1933 when the Glass-Steagall act put a wall between the two kinds of banking. As of now there are now large stand alone investment banks. Here’s the New York Times story: Goldman, Morgan to Become Full-Fledged Banks – Mergers, Acquisitions, Venture Capital, Hedge Funds

The obvious question now is what do these new banks intend to do? Are they sellers … Wachovia Bank from Charlotte was rumored to be looking to buy Morgan Stanley last week. Or are they buyers … Goldman in particular probably will search for bank assets or entire banks to add to its portfolio.

Either way both are now firmly under Federal Reserve supervision, and, not coincidentally, both are now within the ordinary bailout activities of the Fed.

This is shocking news. American banking has been revolutionized in a matter of a few weeks. It is probably weaker now than at any time since the Depression.

The failure of deregulation has left an ugly scar on the banking industry. I find it ironic that it is botched real estate lending that led to the spate of deregulation and industry consolidation during the early 1990’s, and it is precisely the same botched lending that will lead to the reversal of much of that deregulation and consolidation. The lessons learned back then were clearly the wrong ones. Perhaps the regulators and the industry will get it right this time.

Don’t hold your breath!