Right when everyone thought the roller-coaster ride of the US financial crisis was over, along came another jarring twist. Since 1933, when the Glass-Steagall Act was passed, US banks have been segregated into investment banks and retail banks. While retail banks plodded along using depositor capital, Wall Street investment banks could take enormous risks -- with enormous payoffs.
And so it was for 75 years until Sunday night's announcement that Morgan Stanley and Goldman Sachs -- America's last two independent investment banks -- had decided to switch sides and transform themselves into retail banks. In doing so, they have sounded the death knell for the Glass-Steagall structure and -- for now, perhaps -- for a high-risk, high-roller era.
In their new incarnations, Morgan Stanley and Goldman Sachs will offer consumer-banking services and gain permanent access to the discount window of the Federal Reserve. At the same time, they will be subject to the much more stringent regulations of the Fed rather than just those of the Securities and Exchange Commission. In effect, they will need to have more capital on hand relative to the amount they wish to borrow. That means less risk to play with.
While some commentators in German newspapers see the banks' decision as signaling the end of an era, others view it as meaning only that the same game will continue -- but with stricter referees.
The business daily Handelsblatt writes:
"By transforming themselves into full-service banks, Goldman and Morgan Stanley have picked the most elegant solution in their struggle to survive ... In these turbulent times, a consumer bank that performs well is worth its weight in gold. In light of the enormous amount of mistrust in the financial sector, these banks have an enormous advantage: They don't have to rely on the equity or money markets for refinancing because they can fall back on the capital of their depositors. For this reason in particular, in this crisis, the business model of wide-ranging full-service banks won out over focused investment banking."
"The adrenaline branch of investment banking will lose a lot of its glamour. In the 1988 film 'Wall Street,' Michael Douglas played an unscrupulous, risk-happy financial shark named Gordon Gekko, who wore bright pants and slicked back his hair. His motto, 'greed is good,' has prevailed for the past 20 years. The new motto is 'caution is better.' Gordon Gekko's era finally came to a close yesterday. That's bad news for the Ferrari salesmen of the world, but good news for the stability of the financial system."
The Financial Times Deutschland writes:
"When it comes to everyday operations, the institutions will change very little. The only real change is that, from now on, it will be the Federal Reserve, rather than the Security and Exchange Commission, which exercises oversight..."
"Now the banks won't be able to take on such high risks nor bring in such high returns. Market conditions were already forcing them in that direction anyway. In essence, however, the core business model will remain the same: They will continue to provide advice about mergers and public offerings, trade stocks on their own and others' accounts, and invest their own money in takeovers."
The leftist Die Tageszeitung writes:
"Yesterday it became certain: the US investment banking sector is completely disintegrating. ... And it's high time. The idea that led to the separation of investment and commercial banks in the US was perverted a long time ago -- a victim of the frenzy of neo-liberal deregulation. ... In boom times, regulations were seen merely as hindrances (and) greed for ever-increasing profits blinded people to the equally growing risks. Now the whimpering financial sector is approaching the state with tears in its eyes, and the investment banks are happy to put themselves under state control."
"What is upsetting about this is that the banks are now taking action -- with the state so far only talking about cracking down. For a bank to voluntarily surrender itself isn't something that translates to the European market because we don't have this model. But the need to strictly regulate markets -- which the events of the last eight days have clearly demonstrated -- is equally valid on both sides of the Atlantic. If the banks see it this way themselves, you have to ask yourself what the politicians are waiting for."
-- Rachel Nolan, 1:30 p.m. CET