The end of investment banking as we know it?

Do you remember the old REM song "It's the end of the world as we know it"? Well they could have been singing about this past week in finance (except the feeling fine part maybe...). The latest manifestation is the news of yesterday that Morgan Stanley and Goldman Sachs begun the process to convert to a bank holding company. The move will bring them under the protection, but also the regulation, of the Fed.

Some of the coverage of this monumental switch:

Big payoffs off table for Morgan Stanley, Goldman:

"The move to convert to a commercial bank structure will help the two companies avoid the fates of Bear Stearns, Lehman Brothers and Merrill Lynch by giving them broader access to borrow federal money and the ability to build a stable base of deposits.

But it also likely means an end to the sky high profits that were topped by few other companies. The strict rules set by the Federal Reserve will limit opportunities for big payoffs from bets on the price of oil and other investments usually funded with borrowed money.

'The Fed is a much more intrusive regulator...experts expect smaller companies _ including private equity firms and hedge funds _ to take their place.

But even in the area of private equity this switch to a bank holding company may have large implications. For instance, investment bankers have been large players in Private Equity a practice that will likely end.

From the WSJ:

"Goldman has been a big investor in its own private-equity funds, and Morgan Stanley intended to be. Close to half of the capital in Goldman’s most recent, $20 billion buyout fund, for instance, came from the parent company and its employees. Morgan Stanley is expected to contribute about one-third of the capital to its new fund. But changing into bank holding companies may limit how much capital these banks are able to commit to their PE funds...."

From the NY Times:

"The move alters one of the models of modern Wall Street, the independent investment bank, soon after the federal government unveiled the biggest market intervention since the New Deal. It heralds new regulations and supervision of previously lightly regulated investment banks, as well as an end to the outsize paychecks that helped shape the image of the chest-thumping Wall Street banker."

The new classification will also affect the amount of leverage the firms can use.
Again from the NY Times:

"The regulation by the Federal Reserve also brings a host of accounting rule changes that should benefit the two banks in the current environment. [ugh, I cringe when accounting rule changes are ever given as a reason for anything]

In return , they will submit themselves to greater regulation, including limits on the amount of debt they can take on. When it collapsed, Lehman had about a 30:1 debt-to-equity ratio, meaning it had borrowed $30 for every dollar in capital it held. Morgan Stanley currently has a debt-to-equity ratio of 30:1, while Goldman Sachs has one of about 22:1.

Bank of America, on the other hand, currently has about an 11:1 leverage ratio, while JPMorgan has about 13:1 and Citigroup about 15:1."