There are, to say the least, ironies about the most recent bombshell: that Morgan Stanley and Goldman, Sachs & Co. were turning themselves into commercial banks. There's the historical irony that we've essentially reconstructed a pre-Depression universal banking system. There's the irony laced with schadenfreude of all those commercial bankers sent into retirement over the last few decades because they were too set in their lending ways (too old, too inflexible, too dull) to become investment bankers, as the most elite investment banks seek protection behind commercial banking's thick screen of regulation. There is an irony laced with absurdity to realize the mighty Securities and Exchange Commission is now essentially a watchdog over boutiques and middle-market broker-dealers -- the big independent firms having essentially evaporated in a week or so. The staff at the SEC could have a lot of time on their hands.
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But the most interesting irony involves the question of deposits and of a retail audience, which would appear to be part of being a commercial bank. It's true that Morgan Stanley had dabbled on the consumer side of life after its merger with Dean Witter Discover, which brought some semiretail brokerage and a credit card operation. But Morgan Stanley, particularly after John Mack returned to power, was aggressively wholesale. And Goldman Sachs never, ever, publicly seemed to be tempted to enter the mass market, servicing the man on the street. You want to talk about culture clash? You got a flavor of what can happen at Morgan Stanley during the Purcell coup. And imagine Goldman Sachs bank branches or GS CDs. OK, the fact is, Goldman might not have to go that far to generate deposits; it could either raise them in the money markets, which might not be such a hot business, or buy a retail bank and run it at arm's length. But this is a big change from the firm of Robert Rubin, risk arb, or Jon Corzine, fixed-income trader.
The bigger question is how the core wholesale operations change. What's obvious is that over time the risk and leverage profiles of these institutions will be reduced (of course, we knew that before this weekend). What will Morgan Stanley and particularly Goldman do with its large proprietary trading staffs? How will both -- again, particularly Goldman -- adjust their finely calibrated promotion and incentive programs to the new world? What will all those finance types who desperately wanted to pass through Goldman to get their ticket punched do now? Is Lloyd Blankfein, trader, really the perfect guy to run Goldman Sachs Bank?
These events also raise questions about the foreign banks that have had many years now to try to figure out the complexities of universal banking. Will Deutsche Bank AG, UBS and Credit Suisse Group be restrained in terms of leverage in the same ways the Fed will presumably lean on big American banks? Will a kind of regulatory arbitrage begin to take hold -- that is moving operations where you can boost leverage and play a trading game? And what pressures will the Fed feel if this occurs, or if the foreign banks prove to be higher-revving engines to the Americans? Will the Fed feel compelled to step in to help its wards compete in a stunned, if still highly competitive world?
The decision to become a bank holding company was driven by the need to survive this storm. But it does force a new perspective on a fundamental shift made not that long ago at Goldman (1999), longer at Morgan Stanley (1986): the decision to go public -- a subject James Surowiecki deals with in this week's New Yorker. Both Goldman and Morgan Stanley were historically partnerships. Both made the decision to go public to amass greater capital to compete with the big commercial and universal banks. In both cases, the firms were well aware of the cultural changes that would take place; but both recognized that they might become irrelevant if they did not make the move. And for years, the success of the two firms made any questions about the going-public decisions moot.
Now, of course, everything looks a little different. Obviously, you can't turn back, and none could have foreseen this. But in this environment, and perhaps in the world we're stumbling into, there are real positives to being smaller and private, more like a hedge fund or a buyout shop than a big integrated investment bank. This isn't a matter of suggesting that decisions to go public were "wrong," just that in one of history's stranger twists, it looks very different today than just a few weeks ago. "Inevitable" isn't what it used to be. - Robert Teitelman
