The Death of Wall Street

The party is officially over. Wall Street as we have come to know it in the mortgage banking industry is now dead and gone — both Morgan Stanley (MS) and Goldman Sachs (GS), the last two independent investment banks standing, have become commercial bank holding companies. The Federal Reserve first announced the move Sunday evening, saying both companies would need to go through a statutorily-required five day waiting period; government officials then waived the waiting period on Monday afternoon, citing consultation with the Department of Justice. Both companies are now subject to tighter regulatory controls, as a result, but will also gain direct access to Fed funding that they previously (sorely?) lacked. In a press statement, the Fed said it had authorized the Federal Reserve Bank of New York to extend credit to the U.S. broker-dealer subsidiaries and the London-based broker-dealer subsidiaries of both companies. Perhaps the most direct effect of the change in charter will be that both Morgan Stanley and Goldman will need to deleverage significantly from current levels. According to the Wall Street Journal, Banc of America Securities estimated Monday that Morgan Stanley’s current leverage stood at 34x tangible equity, while Goldman’s stood at 27x; commercial banks are capped at a gross leverage ratio of 15x. For most on Wall Street, this is the end of an era; and what the future holds is pretty much anyone’s guess at this point. “All that’s left are boutiques and commercial banks,” said one fund manager that spoke with HW, and asked his name not be used. “If you’d told me bad mortgages could lead to this even six months ago, I’d have said you were nuts.” “It would appear that over the long term, the new financial system will be built around the commercial bank model,” Ladenburg Thalmann analyst Dick Bove said Monday, according to MarketWatch. Morgan Stanley will now be known as Morgan Stanley Bank, NA, with the parent bank holding company known as Morgan Stanley Domestic Holdings, Inc., according to a Monday letter from the Office of the Comproller of the Currency approving the Wall Street firm’s application to change charters. Technically, Morgan Stanley owned a state-charted bank in Salt Lake City that it converted into a nationally-chartered bank. Read the full OCC letter here. Disclosure: The author held no relevant positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.