Business | Banking
Investment bank model abandoned; US bailout debated
Goldman Sachs and Morgan Stanley sought shelter with the Federal Reserve to survive a financial storm that destroyed their rivals, and Wall Street braced for a week of political wrangling over a proposed $700 billion bailout for troubled banks.
- Agencies
- Published: 19:01 September 22, 2008
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New York: Goldman Sachs and Morgan Stanley sought shelter with the Federal Reserve to survive a financial storm that destroyed their rivals, and Wall Street braced for a week of political wrangling over a proposed $700 billion bailout for troubled banks.
Morgan Stanley also struck a deal with Japan's largest bank, Mitsubishi UFJ Financial Group, which agreed on Monday to buy up to a 20 per cent stake in the 73-year-old investment bank, sending Morgan Stanley shares up 10 percent in morning trading.
The Fed's agreement to convert the once high-flying investment banks into more conventional depositary institutions was Washington's latest effort to restore calm to chaotic markets. It followed frantic talks between the Bush administration and Congress to prevent the crisis from pushing the economy into severe recession.
The agreement announced late on Sunday effectively scraps the investment bank model synonymous with Wall Street, ensuring Goldman Sachs Group Inc and Morgan Stanley avoid the fate of rivals that either collapsed or were taken over in the worst US financial crisis since the Great Depression.
Both will face a thicket of new regulations, including the capital requirements that have insulated conventional banks from the year-old credit crisis. The changes will bolster their resources but also curb the spectacular profit growth that have made investment bankers among the highest paid in the nation.
Markets remained skeptical. The Dow Jones industrial average was down 1.2 per cent, led by falls in bank stocks on uncertainty over the proposed $700 billion financial sector bailout, the largest-ever bank rescue.
Caution on bailout
While US congressional Democrats expressed support on Sunday for quick approval of the rescue plan, they cautioned that it must include provisions to guard against potential abuses, raising questions over how long it will take to be passed and what it will ultimately look like.
Democrats, who control both chambers of Congress, expressed concern that the bailout program could expand the powers of the executive branch without adequate oversight - a frequent Democratic criticism of President George W. Bush.
The rescue plan would give sweeping powers to the US Treasury to buy up toxic mortgage-related debt from financial groups, including US subsidiaries of foreign banks.
"We need to see more details from the rescue package. What is missing is the price the US authorities are going to pay for the toxic assets," said Heino Ruland, analyst at FrankfurtFinanz.
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