Goldman, Morgan to
Become Full-Fledged Banks
Bank Holding Companies
ANDREW ROSS SORKIN / New York Times 21sep2008
|
Goldman Sachs and Morgan Stanley, the last two independent investment banks, will become bank holding companies, the Federal Reserve said Sunday night, fundamentally altering the landscape of Wall Street.
The move fundamentally changes one of the mainstay models of modern Wall Street, the independent investment bank, soon after the federal government unveiled the biggest market rescue since the Great Depression. It heralds new regulations and supervisions of previously lightly regulated investment banks. It is also the latest signal by the Federal Reserve that it will not let Goldman or Morgan fail.
The move comes after the bankruptcy of Lehman Brothers and the near-collapses of Bear Stearns and Merrill Lynch.
Now, Goldman and Morgan Stanley, which have been the subject of merger speculation in recent weeks, can become direct competitors to larger firms like Citigroup, JPMorgan Chase and Bank of America. Those firms combine investment-banking operations with the larger capital cushions that come with retail deposits, giving them a stability that pure investment banks lack.
JPMorgan acquired Bear Stearns this spring in a fire sale brokered by the federal government, while Bank of America has agreed to buy Merrill Lynch for $50 billion. Barclays of Britain agreed to buy the core capital-markets business of Lehman Brothers out of bankruptcy late last week.
Announced without fanfare on Sunday night, the move signals the final end to the Glass-Steagall Act [see below], the epochal legislation of 1933 that signaled a split between investment banks and retail banks. A law passed in 1999 repealed the earlier regulation, though Goldman and Morgan remained independent investment banks.
Morgan Stanley had sought other ways to bolster its capital, and had been in advanced talks with China’s sovereign wealth fund and others about raising as much as $30 billion, people briefed on the matter said Sunday night.
“While accelerated by market sentiment, our decision to be regulated by the Federal Reserve is based on the recognition that such regulation provides its members with full prudential supervision and access to permanent liquidity and funding,” Lloyd C. Blankfein, Goldman Sachs’s chairman and chief executive, said in a statement Sunday night. “We believe that Goldman Sachs, under Federal Reserve supervision, will be regarded as an even more secure institution with an exceptionally clean balance sheet and a greater diversity of funding sources.”
“This new bank holding structure will ensure that Morgan Stanley is in the strongest possible position — with the stability and flexibility to seize opportunities in the rapidly changing financial marketplace,” John J. Mack, Morgan Stanley’s chairman and chief executive, said in a statement. It also offers the marketplace certainty about the strength of our financial position and our access to funding.”
By becoming bank holding companies, Goldman Sachs and Morgan Stanley gained some breathing room in the immediate term. But it likely lays the groundwork for additional deal making. Given the expected bank failures this year, it is possible Goldman and Morgan Stanley could seek to buy them cheaply in a “roll-up” strategy.
Prior to the move, federal regulations prohibited the two investment banks from pursuing such deals. Indeed, Morgan Stanley’s recent talks with Wachovia revolved around Wachovia buying Morgan Stanley.
Being a bank holding company would also give the two access to the discount window of the Federal Reserve. While they have had access to Fed lending facilities in recent months, regulators had planned to take away discount window access in January.
The regulation by the Federal Reserve brings a host of accounting rule changes that should benefit the two banks in the current environment.
In return, they will submit themselves to greater regulation, including limits on the amount of debt they can take on. When it collapsed, Lehman had about a 30:1 debt-to-equity ratio, meaning it had borrowed $30 for every dollar in capital it held. Morgan Stanley currently has a debt-to-equity ratio of 30:1, while Goldman Sachs has one of about 22:1.
Bank of America, on the other hand, currently has about an 11:1 leverage ratio, while JPMorgan has about 13:1 and Citigroup about 15:1. Because they can borrow less, bank holding companies typically have lower earnings multiples.
In its statement, Goldman said that it will now become the nation’s fourth-largest bank holding company, with its small existing deposit-taking units to be rolled into GS Bank USA. Morgan Stanley will convert its Utah industrial bank into a deposit-taking national bank, to be called Morgan Stanley Bank.
— Michael J. de la Merced, Vikas Bajaj and Andrew Ross Sorkin
source: 21sep2008
Important Banking Legislation
FDIC
The most important laws that have affected the banking industry in the United States are listed below.The Main Library of the FDIC, located at the FDIC offices in Washington, D.C., has legislative histories of these laws. These legislative histories help to provide a better understanding of lawmakers' intent for the purpose and scope of the laws. The public can make an appointment to use these materials by contacting the FDIC Library. [email link to FDIC library]
National Bank Act of 1864 (Chapter 106, 13 STAT. 99). Established a national banking system and the chartering of national banks.
Federal Reserve Act of 1913 (P.L. 63-43, 38 STAT. 251, 12 USC 221). Established the Federal Reserve System as the central banking system of the U.S.
To Amend the National Banking Laws and the Federal Reserve Act (P.L. 69-639, 44 STAT. 1224). Also known as The McFadden Act of 1927. Prohibited interstate banking.
Banking Act of 1933 (P.L. 73-66, 48 STAT. 162). Also known as the Glass-Steagall Act. Established the FDIC as a temporary agency. Separated commercial banking from investment banking, establishing them as separate lines of commerce. [MORE]
Banking Act of 1935 (P.L. 74-305, 49 STAT. 684). Established the FDIC as a permanent agency of the government.
Federal Deposit Insurance Act of 1950 (P.L. 81-797, 64 STAT. 873). Revised and consolidated earlier FDIC legislation into one Act. Embodied the basic authority for the operation of the FDIC.
Bank Holding Company Act of 1956 (P.L. 84-511, 70 STAT. 133). Required Federal Reserve Board approval for the establishment of a bank holding company. Prohibited bank holding companies headquartered in one state from acquiring a bank in another state.
International Banking Act of 1978 (P.L. 95-369, 92 STAT. 607). Brought foreign banks within the federal regulatory framework. Required deposit insurance for branches of foreign banks engaged in retail deposit taking in the U.S.
Financial Institutions Regulatory and Interest Rate Control Act of 1978 (P.L. 95-630, 92 STAT. 3641). Also known as FIRIRCA. Created the Federal Financial Institutions Examination Council. Established limits and reporting requirements for bank insider transactions. Created major statutory provisions regarding electronic fund transfers.
Depository Institutions Deregulation and Monetary Control Act of 1980 (P.L. 96-221, 94 STAT. 132). Also known as DIDMCA. Established "NOW Accounts." Began the phase-out of interest rate ceilings on deposits. Established the Depository Institutions Deregulation Committee. Granted new powers to thrift institutions. Raised the deposit insurance ceiling to $100,000.
Depository Institutions Act of 1982 (P.L. 97-320, 96 STAT. 1469). Also known as Garn-St. Germain. Expanded FDIC powers to assist troubled banks. Established the Net Worth Certificate program. Expanded the powers of thrift institutions.
Competitive Equality Banking Act of 1987 (P.L. 100-86, 101 STAT. 552). Also known as CEBA. Established new standards for expedited funds availability. Recapitalized the Federal Savings & Loan Insurance Company (FSLIC). Expanded FDIC authority for open bank assistance transactions, including bridge banks.
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (P.L. 101-73, 103 STAT. 183). Also known as FIRREA. FIRREA's purpose was to restore the public's confidence in the savings and loan industry. FIRREA abolished the Federal Savings & Loan Insurance Corporation (FSLIC), and the FDIC was given the responsibility of insuring the deposits of thrift institutions in its place. The FDIC insurance fund created to cover thrifts was named the Savings Association Insurance Fund (SAIF), while the fund covering banks was called the Bank Insurance Fund (BIF). FIRREA also abolished the Federal Home Loan Bank Board. Two new agencies, the Federal Housing Finance Board (FHFB) and the Office of Thrift Supervision (OTS), were created to replace it. Finally, FIRREA created the Resolution Trust Corporation (RTC) as a temporary agency of the government. The RTC was given the responsibility of managing and disposing of the assets of failed institutions. An Oversight Board was created to provide supervisory authority over the policies of the RTC, and the Resolution Funding Corporation (RFC) was created to provide funding for RTC operations.
Crime Control Act of 1990 (P.L. 101-647, 104 STAT. 4789). Title XXV of the Crime Control Act, known as the Comprehensive Thrift and Bank Fraud Prosecution and Taxpayer Recovery Act of 1990, greatly expanded the authority of Federal regulators to combat financial fraud. This act prohibited undercapitalized banks from making golden parachute and other indemnification payments to institution-affiliated parties. It also increased penalties and prison time for those convicted of bank crimes, increased the powers and authority of the FDIC to take enforcement actions against institutions operating in an unsafe or unsound manner, and gave regulators new procedural powers to recover assets improperly diverted from financial institutions.
Federal Deposit Insurance Corporation Improvement Act of 1991 (P.L. 102-242, 105 STAT. 2236). Also known as FDICIA. FDICIA greatly increased the powers and authority of the FDIC. Major provisions recapitalized the Bank Insurance Fund and allowed the FDIC to strengthen the fund by borrowing from the Treasury. The act mandated a least-cost resolution method and prompt resolution approach to problem and failing banks and ordered the creation of a risk-based deposit insurance assessment scheme. Brokered deposits and the solicitation of deposits were restricted, as were the non-bank activities of insured state banks. FDICIA created new supervisory and regulatory examination standards and put forth new capital requirements for banks. It also expanded prohibitions against insider activities and created new Truth in Savings provisions.
Housing and Community Development Act of 1992 (P.L. 102-550, 106 STAT. 3672). Established regulatory structure for government-sponsored enterprises (GSEs), combated money laundering, and provided regulatory relief to financial institutions.
RTC Completion Act (P.L. 103-204, 107 STAT. 2369). Requires the RTC to adopt a series of management reforms and to implement provisions designed to improve the agency's record in providing business opportunities to minorities and women when issuing RTC contracts or selling assets. Expands the existing affordable housing programs of the RTC and the FDIC by broadening the potential affordable housing stock of the two agencies. Increases the statute of limitations on RTC civil lawsuits from three years to five, or to the period provided in state law, whichever is longer. In cases in which the statute of limitations has expired, claims can be revived for fraud and intentional misconduct resulting in unjust enrichment or substantial loss to the thrift. Provides final funding for the RTC and establishes a transition plan for transfer of RTC resources to the FDIC. The RTC's sunset date is set at Dec. 31, 1995, at which time the FDIC will assume its conservatorship and receivership functions.
Riegle Community Development and Regulatory Improvement Act of 1994 (P.L. 103-325, 108 STAT. 2160). Established a Community Development Financial Institutions Fund, a wholly owned government corporation that would provide financial and technical assistance to CDFIs. Contains several provisions aimed at curbing the practice of "reverse redlining" in which non-bank lenders target low and moderate income homeowners, minorities and the elderly for home equity loans on abusive terms. Relaxes capital requirements and other regulations to encourage the private sector secondary market for small business loans. Contains more than 50 provisions to reduce bank regulatory burden and paperwork requirements. Requires the Treasury Dept. to develop ways to substantially reduce the number of currency transactions filed by financial institutions. Contains provisions aimed at shoring up the National Flood Insurance Program.
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (P.L. 103-328, 108 STAT. 2338). Permits adequately capitalized and managed bank holding companies to acquire banks in any state one year after enactment. Concentration limits apply and CRA evaluations by the Federal Reserve are required before acquisitions are approved. Beginning June 1, 1997, allows interstate mergers between adequately capitalized and managed banks, subject to concentration limits, state laws and CRA evaluations. Extends the statute of limitations to permit the FDIC and RTC to revive lawsuits that had expired under state statutes of limitations.
source: 21sep2008
|
To
send Mindfully.org your comments, questions, and suggestions click
here |
