End of Wall St era; bailout to be hotly debated
Wall Street's last two big investment banks, Goldman Sachs and Morgan Stanley, secured Federal Reserve approval to become banks, ending the swashbuckling era of American deal making amid the worst U.S. financial crisis since the Great Depression, reported Reuters.
Morgan Stanley went a step further and struck a deal with Japan's largest bank, Mitsubishi UFJ Financial Group (8306.T), which agreed on Monday to buy up to a 20 percent stake in the prestigious 73-year-old investment bank, sending Morgan Stanley shares higher.
But other financial stocks and the broader market fell as attention turned to political wrangling in Washington over a proposed $700 billion bailout for troubled banks.
The crisis, which has seen major firms such as Lehman Brothers collapse and others such as Merrill Lynch bought, has dragged on since last year, when falling U.S. home prices, a sluggish economy and problems on Wall Street led to a severe credit crunch.
With details of the bailout plan sketchy on key questions such as what price the U.S. government would pay for toxic mortgage-related securities, markets remained unsettled.
"Even as the package is being debated, we could see more sizable losses or another significant institution come under pressure," said Richard McGuire, interest rate strategist at RBC Capital Markets.
Standard Bank analyst Walter de Wet said, "The U.S. plan has calmed nerves, but I don't think people believe it will take out all the problems yet. Details are still sketchy. We need to see when and how the plan will be implemented."
The Group of Seven finance ministers and central bank governors promised "heightened close cooperation" to safeguard the international financial system.
Central banks from Europe to Japan sought to shore up banks by injecting money into the banking system. And even in the oil-rich Gulf region, the impact of the crisis was felt.
The United Arab Emirates Central Bank launched its first ever emergency funding facility, worth almost $14 billion, to help fund banks as global lending between banks shrivels.
U.S. stocks indexes fell about 2 percent, the U.S. dollar fell 1 percent, and the 10-year U.S. Treasury yield hit its highest level in more than a month as investors worried about profligate government spending. And oil prices soared.
The Fed's agreement to convert the once high-flying Wall Street 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 (GS.N) and Morgan Stanley (MS.N) avoid the fate of rivals that either collapsed or were taken over in the brutal meltdown of recent weeks.
Democrats, who control both chambers of Congress, expressed support for quick approval of the rescue plan but also concern that it could expand the powers of the executive branch without adequate oversight -- a frequent Democratic criticism of President George W. Bush.
The rescue would give sweeping powers to the U.S. Treasury to buy up toxic mortgage-related debt from financial groups.
Bush said in a statement, "Failure to act would have broad consequences far beyond Wall Street." Delay would threaten small businesses and home owners, he said.
Senate Democrats called on the administration to take a stake in firms unloading assets, limit the pay of the executives involved, and set up an oversight board to limit the Treasury's powers.
"We need to see more details from the rescue package," said Heino Ruland, analyst at FrankfurtFinanz. "What is missing is the price the U.S. authorities are going to pay for the toxic assets."
Both Goldman and Morgan will now 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.
Investment banks can borrow about $30 for every dollar of shareholder equity, but commercial banks can borrow less than half that amount. That means Goldman and Morgan now face a substantial decrease in profits.
In return for tighter regulation, Goldman and Morgan will gain greater access to central bank funds and will find it easier to buy retail banks.
As Wall Street sought details of what will become the nation's largest-ever bank rescue, markets were looking ahead to Tuesday, when U.S. Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke begin an intensive two-day round of congressional hearings to hasten approval of the bailout legislation.
The rescue was cobbled together late in a week of seismic shifts on Wall Street that saw Lehman Brothers Holdings Inc (LEHMQ.PK) file for bankruptcy, Merrill Lynch & Co (MER.N) agree to sell itself to Bank of America Corp (BAC.N), and the Fed stage an $85 billion rescue for insurer American International Group Inc (AIG.N).
Goldman and Morgan Stanley were the last surviving of the big five investment banks that shaped 20 years of Wall Street history. Bear Stearns collapsed earlier this year.
After the Fed move, Mitsubishi UFJ Financial Group said it would buy up to one-fifth of Morgan Stanley as part of a strategic alliance, an investment estimated at $8.5 billion.
Elsewhere, Japan's biggest brokerage, Nomura Holdings Inc (8604.T), is to buy the Asian operations of Lehman, a source with direct knowledge of the deal said. And in Europe, Nomura and Britain's Barclays Plc (BARC.L) have pitched bids for parts of Lehman's business.
With the economy the No. 1 issue in a U.S. presidential election less than six weeks away, lawmakers are striving to get a plan in place by the end of the week, fearing delay could send markets reeling again.
"It's important we act quickly but more important that we act responsibly," Senate Banking Committee Chairman Christopher Dodd told the CBS Early Show.