One thing is becoming amply clear: if Goldman and Morgan Stanley want to go into retail banking they'll have to reduce leverage big time. And reducing leverage will mean less of several things: prop trading, principal investing and leveraged lending.
Deal Journal points out that the respective leverage ratios of Morgan Stanley and Goldman are 34 and 17. Commercial banks usually have ratios something in the region of 15.
Gillian Tett at the FT says de-leveraging of this magnitude could spark $6 trillion of asset sales. Capital available for speculation and lending will inevitably have to fall at the same time.
Goldman has already been reducing leveraged finance jobs and there may now be more cuts to come. But the biggest impact is likely to be felt in areas like Goldman's prop trading desk, staffed by the most masterful of the masters of the universe.
The most obvious option for the prop trading MoUs is to take a trip over to a hedge fund, the only problem being that they're not doing particularly well, either, with only 10% above the high water mark at which they can charge performance-related fees from which bonuses are paid.
Retail bankers all the rage
While the prop trader's star is sinking, the retail banker's star seems to be rising. Although it seems more likely that GS and MS will buy up deposits or retail institutions than set anything up from scratch, both banks lack the expertise to deal with deposit taking and all that entails.
Jamie Risso Gill, head of the retail banking search practice at Sheffield Haworth, points out that running a retail bank with a branch network is highly manpower-intensive: "As a start, they'd need a salesforce, directors of the branch network, someone responsible for mortgages, someone responsible for retail banking, and someone responsible for credit cards."