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Tuesday, 23 September 2008

The end of an era

NEW YORK - GOLDMAN Sachs and Morgan Stanley brought down the curtain on a Wall Street era on Sunday, agreeing to a radical revamp that completes the biggest overhaul in high finance since the Great Depression.

The last two major independent investment banks in the United States will become holding companies, a rescue move which accepts the kind of government regulation that Wall Street's top high-rollers long fought bitterly against.

Even as the United States announced a US$700 billion (S$999 billion) bailout to save financial institutions, the firms themselves asked for the change as one after the other of their rivals were swallowed up in the global financial crisis.

The move submits both firms to significantly more regulation and will limit the massive profits that spawned a culture of high-risk finance and made them, along with other investment banks, the envy of Wall Street.

As holding companies, both firms will have easier access to credit to survive the current crisis - unlike former rivals Lehman Brothers, which collapsed, and Bear Stearns and Merrill Lynch, which were taken over.

But it will also halt much of the massive risk-taking, often funded with huge debt, that created the swaggering investment-banking culture of Wall Street legend - a winner-take-all mentality often caricatured as naked greed.

Both firms will have to radically cut back the amount of money they borrow relative to the capital they have, a restriction that will curb profits dramatically.

'We believe that Goldman Sachs, under Federal Reserve supervision, will be regarded as an even more secure institution with an exceptionally clean balance sheet,' said Goldman chairman Lloyd Blankfein.

He said the decision had been 'accelerated by market sentiment' - an acknowledgement of the global financial turmoil that has transformed the face of Wall Street virtually overnight.

As the world financial crisis deepened last week, the US government took over troubled insurer AIG, Lehman Brothers collapsed and Merrill Lynch was bought out. Morgan Stanley was already in talks on a possible merger.

'This new bank holding structure will ensure that Morgan Stanley is in the strongest possible position,' chairman John Mack said.

Looking to shore up confidence and draw a line under the crisis, the US government put together a US$700 billion dollar bailout proposal.

The plan, now urgently awaiting approval by US lawmakers, would give the US Treasury almost free rein to buy up bad mortgage-related debts which sparked the current crisis.

US Treasury Secretary Henry Paulson said at the weekend that the US Congress now needed to take action fast.

'We need this to be clean and quick and we need to get it in place,' he said.

The US bailout plan brought cheer to markets. Asian bourses were largely up on Monday, and the Dow Jones surged 3.3 per cent on Friday.

But Europe's main markets dipped in early trade on Monday amid real uncertainty about the massive plan, the biggest bank rescue ever.

US financial authorities have meanwhile been working with their counterparts in Europe and Asia over the past fortnight to prevent a collapse of the global financial system.

Australia and Taiwan became the latest markets to announce restrictions on short-selling - a stock bet that share prices will go down, and which often helps them do so. -- AFP

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