The U.S. Treasury, Federal Reserve and Congress are currently working out the details of a bailout plan that's intended to essentially, rescue the financial services sector and the economy.
So as the discussion heats up on Capitol Hill, here is a look at how the financial landscape has changed thus far and the changes we might see down the road.
The End of the Standalone Broker-Dealer
Soon after I published my
five lessons from the financial crisis,
Goldman Sachs (GS Quote - Cramer on GS - Stock Picks) and
Morgan Stanley (MS Quote - Cramer on MS - Stock Picks) took action.
Over the weekend, both of these remaining standalone
broker-dealer/
investment banking companies applied to the Federal Reserve for permission to change their structure to bank holding companies. The Fed approved this move and now here are several implications of it:
The primary regulatory agency which will oversee these companies will now be the Federal Reserve rather than the Securities and Exchange Commission (SEC), thus their capital and reporting requirements will significantly change.
Morgan Stanley may have preempted the need to bulk-up on capital by selling a stake in the company to Mitsubishi UFJ (MTU Quote - Cramer on MTU - Stock Picks).
Both of these companies can now build natural deposit bases. This could be done by building their own banks or perhaps by buying or merging with smaller institutions that have existing brick-and-mortar branch systems.
Also, Goldman Sachs and Morgan Stanley could take something from the Merrill Lynch (MER Quote - Cramer on MER - Stock Picks) model. (Merrill Lynch was recently acquired by Bank of America (BAC Quote - Cramer on BAC - Stock Picks).) Merrill Lynch used a "sweep" function in its retail brokerage accounts, whereby all cash balances were swept into a Merrill Lynch-owned bank rather than money market accounts.
As bank holding companies, they will have direct access to the Federal Reserve banking system. This will allow Goldman Sachs and Morgan Stanley to borrow directly from the Fed at the lowest rates available.
The Disintegration and Convergence of the Financial Sector
In "
Understanding the Financial Sector: Banks" I broke down the banking world into three groups: money center banks, investment banks/brokers and savings and loan (S&L or "thrift") institutions. Here are few key points on the state of banks today:
Simply put, firms that were poorly managed, took excessive risk or were over-leveraged will no longer exist. That has already occurred with Countrywide (acquired by Bank of America in January), Lehman Brothers and Bear Stearns (acquired by JP Morgan Chase (JPM Quote - Cramer on JPM - Stock Picks) in March).
Stay tuned for more shakeouts, as weak banks either go bankrupt or are acquired. For example, keep an eye on the state of S&L Washington Mutual (WM Quote - Cramer on WM - Stock Picks).
The concept of the financial services conglomerate, which was once ridiculed due to the failure of the Citicorp-Travelers merger (1998) that created the Citigroup (C Quote - Cramer on C - Stock Picks) we know today, will now become more commonplace.
Citigroup's failure is not due to the conglomerate concept but rather, execution of the business strategy and an internal cultural that promoted competition and divisiveness.
Watch for Bank of America and JP Morgan Chase to create financial monoliths, by combining all of the elements of the financial sector under one corporate identity.
Risk avoidance will take priority over risk taking. Balance sheets will be more managed, more diversified and no single product or business will dominate.
Scott Rothbort
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