You’d think the last thing Goldman Sachs and Morgan Stanley would choose to become is a [regular] bank, says Lex. Such is the fury at financials these days they should have re-classified themselves as cuddly toymakers. But this simple change is tactically smart. Confidence in broker-dealers is shot; by becoming regulated banks Goldman and Morgan Stanley have ensured their survival. They now have long-term access to the Fed’s primary credit facility and can tap alternative sources of funding such as deposits. Certainly Mitsubishi UFJ – which agreed to buy a stake in Morgan Stanley on Monday – must think the US bank will exist a while longer yet. This new status also reflects a new reality. Investors have lost faith in wholesale funding models. If markets regain composure, Goldman and Morgan Stanley should benefit from reduced competition in their field. But they will probably have to buy retail deposits or themselves be acquired by a deposit-taking institution, if for no other reason than to please regulators and baying shareholders. Nor is there any guarantee they would be successful. Retail banking requires scale and a trustworthy brand – broker-dealers are a little short of both at the moment.

This entry was posted by Gwen Robinson on Tuesday, September 23rd, 2008 at 5:22 and is filed under Capital markets. Tagged with goldman sachs, morgan stanley. Edit this entry.