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The brokerage model is deeply flawed. The best that Morgan Stanley and Goldman can hope for is a shutgun wedding with a big pocketed universal banking rival, and we’re all doomed.
Nouriel Roubini, blogger, Professor of Economics and professional pessimist, thinks that where Lehman and Bear Stearns have gone, Goldman and Morgan Stanley will soon follow.
Roubini’s reasoning is that broker-dealers are just as susceptible to a run on the bank as Northern Rock & Co., and they don’t have any retail or commercial deposits to back them up. “The biggest problem is that they borrow in middle markets literally overnight, are leveraged 20 or 30 times, and lend very long term,” he declared during an interview on CNBC.
John Gapper, over at the FT seems to be of the same opinion.
“It seems to me that Goldman and Morgan Stanley have two options. One is to follow Merrill and sell out to a large commercial bank with a big capital and deposit base….The second is to scale back heavily, or abandon, their broker-dealer arms and become more like big hedge funds or private equity funds.”
Equally downbeat is Christpher Walen of Institutional Risk Analytics, who thinks that if Goldman and Morgan Stanley try to carry on alone, they’ll be shorted to death by hedge funds.
Do you dare disagree? We invite you to do so below.
Goldman is the one bank to have come through this crisis with flying colours. It has the best traders and the best risk managers in the world. Of course it won’t be next. What planet are you people on?
It’s about time we bring our belief in these people back to earth. 12-24 months ago executives at Wall Streets were regarded as Financial Gods for the very same thing that now they are getting fired for. It’s time to go back to asking basic questions to all these elaborate models that were created and that ultimately nobody really understood. Successful business is based on trust and answering basic simple questions, not believing in supernatural god given financial gifts and MIT models that mean nothing. So yes Goldman could very well fall like the others, because some of its executives are people motivated by the same greed and lack of vision as those banks that crashed.Let’s hope not all of them for the sake of their employees.
The irony of the falling stock price is all the super brain, algo quants at the broker-dealers have developed blackbox algo models that kill weak looking stock. In effect, their own algos are killing them.
The first comment posted boasts blatantly that Goldman …won’t be next…” Well wasn’t that what Lehman Brothers bleated some weeks ago when Bear Stearn collapsed? No Wall Street firm is immune to this virulent virus created by their own greed and limitless risk-apetite!
Goldman has profited 4bln in the last 9 months! this is the question – who could actually predict better?
The debacle of these Investment Banks shows that there was a problem with the strategies at the top end. Everyone was busy in capitalising the spreads, they forgot the pace of decay.So the risk needs to be redefined, and models need to revisited. Goldman & MS will learn and now it all depends on the support they get from the market. Undue panic should not happen!!
Goldman and Morgan will survive on such conditions – clearly draw the lines of business activities of investment and universal banks, i.e. universal banks play lesser role in debt or equity underwriting reducing their balance sheet size advantage, have in-place something like long-term revolving credit facilities with funding banks for investment banks and etc. That should level the playing field for both forms of banking business model. So it’s now up to the regulars to scratch their heads working this out.
Goldman is a quality name and the results, in a dire market, show this. MS is also a solid M&A advisory house. Both will have it tough but will emerge as the last two standing and will be even more commanding.
The fact is ML, Lehman, and the other littlen were never in the same league.
Goldmans. Ha ha. 3Q filing…
” backlog of pending investment banking deals increased”
I’ll bet. They’ve got all this M&A sitting about they haven’t got round to. Must be busy measuring all that level 3.
Short it.
First important point is that MS whether you like it or not is not at the same league of GS. GS is unbeatable and will not fall, its main asset is not mbs, abs, cds, equity, debt, or whatever you want.. is human capital and no one ever learned to manage this asset so well as Goldman did. You are more likely to see the FED go bust before GS.
“I’m not telling you” is full of Conventional Wisdom. It is thanks to people like “I’m not telling you” that it makes sense to pour vasts amounts of money in PRs and advertisement.
The “I’m not telling you” guys in ’29 believed the ‘fundamentals are good’ that they heard from allegedly respectable authority. Their contemporary heirs believed the ‘fundamentals are good’ comments -deprived of any arguments – that we heard a year ago.
Reality has checked few people out of the market in the meantime. Wait and see.
Anyone has a link to a forum where the question is debated in more subtle details than here?
It’s ridiculous and naive to suggest that the likes of Goldman could fund their trading activities with retail deposits. Regulators would not allow it. Period.
Morgan Stanley said it was prefunded for the rest of the year in its conference call today, so shld be fine til Dec.
I believe the correct term is “shotgun wedding”
There are a few comments saying “Of course it won’t be next. What planet are you people on?”, “Goldman is unbeatable”. True Goldman has some brilliant people. But so did LTCM. Would anyone have said 1year or even 3months back that Bear or Lehman was managed by dumb people. The day before Bear went bust Jim Cramer was screaming “buy” for Bear.
The question in the article was different though. The question was whether GS and MS are more prone to the idiocyncracies that we are seeing in the market. Goldman is also just another entity managed by people – they are in no way immune. And they have predicted many of the market moves correctly in the past, it doesnt mean that they will get the future moves right. Everyday is a coin toss in this business.
GS & MS are way better on risk mgt. However, they’ll prosper less in the future w/o cheap credits available & heavy scrutiny by regulators across the globe. I personally, however, strongly oppose to the model of financial supermarket. look at the failure of Citi, HSBC, BoA. they all destroy the legacy of IBs bought
The day Goldman goes down is the day the financial system collapses
On the one hand, I do subscribe to the view that GS and MS are and always were in a league of their own vs. other investment banks. The only edge you have in this business is the best people – and it starts from day one in the job. If you had the option out of university to join a number of investment banks, anybody in their right mind who had several offers including one from one of the two above would chose that over any other bank (show me the LSE graduate who would pick DB over MS…). So already from day one they get first pick, and consequently the highest quality people. On the other hand, this slight superiority (with a strong emphasis on slight – dont think anybody would claim Lehman, ML etc. are/very manned by stupid people, they have done very well in many areas), seems to have been an asset that has been leveraged to max effect for PR purposes to quite frankly blow this superiority of the two institutions completely out of proportion. I find the whole “The Smartest Guys In The Room who never fails” notion around GS which some naive souls seem to believe in very blue-eyed. Remember the last company that had managed to create this image of itselt was called Enron
Am looking at Morgan Stanley Q3 press release and it does not look encouraging. Yes, they have beaten analysts’ expectations but $1.4bln of their earnings comes from marking to market their own long terms debt to reflect deteriorating credit spreads. I don’t call it real money (at least, our bankers do not get IC on these revenues). You remove “accounting P&L” and you are left with very average results.
The question should be why aren’t those greedy hedge funds regulated! They are the ones causing most of the anarchy in the markets because they can get away with it and milk the gains…
From KBW analysts on Morgan Stanley – ‘Looking through this credit crisis, MS has a top-tier institutional business that has certainly felt the weight of this crisis, but its core underlying client franchise and top tier positioning in businesses like prime brokerage, have remained solid and in our view will be the beneficiaries of the problems at smaller and unfortunately weaker competitors that has become painfully evident over the past 6 months…Generally speaking, there is market share up for grabs and we believe MS is front and center and will capture their fair share and then some.’