What I Learned Today - what's a bank holding company?

23rd September 2008

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what’s a bank holding company?

In the largest restructuring deal since the Depression, on Sunday the Fed approved the applications of Goldman Sachs and Morgan Stanley to become “bank holding companies.”

A bank holding company is, by definition, a company that owns and controls one or more US bank. Basically, this now means the Morgan Stanley and Goldman Sachs are more like retail or commercial banks. You know - the ones that take and hold deposits from you and me (think BofA). They’ll be supervised by the government. Before any major activity, like a merger or acquisition, the Federal Reserve must approve.

The benefits of becoming a bank holding company are that Goldman and MS can now take on debt tax free. They are also viewed are more stable by investors, who last week thought they were not solid enough to survive. This will provide the bank access to “permanent liquidity and funding,” and will, thus, be given more flexibility to carry on during the tumultuous marketplace.

This marks the end of the investment banking industry as we knew it. In a personal note, a professor of mine noted “If you came to school to go into investment banking for the money, don’t bother.” Now these former ibanks will no longer be able to pay lavish bonuses on top of already high salaries. They’ll have higher capital requirements (= less debt) and more oversight (= less risky endeavors). This change may mean more jobs, however, as they’ll have to bulk up in order to take and hold deposits from more people.

On an interesting note - did you know that prior to this week, the US and Japan were the only countries in the world with standalone investment banks? Now it’s just Japan.