Goldman, Morgan Stanley Not Seen Hampered By New Regulation
June 17 2009 - 3:14PM
Dow Jones News
Treasury Secretary Timothy Geithner's mantra to create a "more
boring" financial system may not hamper Wall Street's risk-taking
culture.
Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS), the two
biggest independent U.S. securities firms, already have scaled back
risk as the government stepped in. It isn't expected that
regulators will become even more heavy handed, people inside the
two banks said.
The government's new regulatory regime is expected to guard
against the kind of systemic risk that triggered the worst
financial crisis since the 1930s. But analysts don't believe the
new oversight plan will be that much of a drag on their current
business mix.
"I think the framework that evolved in the broker-dealer
community will remain intact," said Roger Freeman, an analyst at
Barclays Capital. "Nothing is going to change. But I think the
government will still have plenty of avenues to influence them
going forward."
The transformation into bank holding companies ushered in
tougher supervision for previously lightly regulated investment
banks. It was designed to keep Goldman and Morgan Stanley afloat as
the financial crisis forced Lehman Brothers into bankruptcy, and
nearly collapsed Bear Stearns and Merrill Lynch.
Goldman and Morgan Stanley submitted themselves to stringent
capital requirements, limits about the amount of debt they can take
on, and greater scrutiny on executive pay. The steps helped calm
nervous investors about the investment banks' survival, but also
clipped the companies' ability to turn huge profits by limiting the
risks they could take.
The investment banks still have to make some changes to conform
to the new regulatory environment. As bank holding companies, they
aren't currently allowed to be in businesses such as
transportation, commodities and real estate.
For instance, Goldman Sachs owns commodity trader J. Aron &
Co. and is the largest shareholder of oil refiner CVR Energy Inc.
(CVI). Morgan Stanley owns fuels distributor TransMontaigne
Partners and oil tanker company Heidmar Group.
However, they have five years to change their business models --
or, possibly, have those businesses grandfathered in. Analysts
believe keeping essentially their current mix of businesses won't
be hard to do.
One potential solution to their problems is the
Gramm-Leach-Bliley Act, a 1999 amendment to the bank holding act
that allows banks to convert to financial holding companies. This
new status would allow Goldman and Morgan Stanley to engage in a
larger swath of businesses, such as merchant banking, commodities,
and real estate.
"They might convert to a financial holding company, which allows
them to operate in the banking sector but also in the industrial
sector," said Richard X. Bove, an analyst with Rochdale Securities.
"And, we're now starting to see the basic businesses with Goldman
and Morgan Stanley come alive again."
-By Joe Bel Bruno, Dow Jones Newswires; 201-938-4047;
joe.belbruno@dowjones.com