All the pillars of Wall Street have turned to dust.
There are none left.. Those were the last ones.
What could be next?
What is a bank holding company?
According to Wikipedia:
"A bank holding company, under the laws of the United States, is any entity that directly or indirectly owns, controls or has the power to vote 25% or more of a class of securities of a U.S. bank. Bank holding companies are required to register with the Board of Governors of the Federal Reserve System. Actions of bank holding companies are covered under the Bank Holding Company Act of 1956 (12 U.S.C. § 1841(a)(2)(A) et seq.)."
"The Federal Reserve Board, under Regulation Y (12 C.F.R. Pt. 225) has responsibility for regulating and supervising bank holding company activities, such as approving mergers and acquisitions and inspecting the operations of such companies. This authority applies even though a bank owned by a holding company may be under the primary supervision of the Comptroller of the Currency or the Federal Deposit Insurance Corporation."
Reasons for adopting BHC status
"New or smaller banks often convert themselves into bank holding companies to take advantage of the greater financial flexibility this designation affords them."
"Becoming a bank holding company makes it easier for the firm to raise capital than if it remained a traditional bank. It can assume debt of shareholders on a tax free basis, borrow money, acquire other banks and non-bank entities more easily, and issue stock with greater ease. It also has a greater legal authority to repurchase its own stock once issued."
"The downside includes greater levels of regulation, especially if there are more than 300 shareholders, at which point the bank holding company is forced to file with the Securities and Exchange Commission. There are also added expenses of operating with an extra layer of administration. This is usually offset by the fact that BHCs are often exempt from many of the state regulations and fees that a traditional bank would face."
Morgan Stanley and Goldman Sachs are not no longer independent brokers; they've transformed themselves into banks.
The word among traders (this changes every minute) is that the news is not helping the "futures" and at the moment, they are pointing in the negative direction for Monday's opening. Some think the GS and MS stocks may go up, as this change of status may help them raise capital. Under normal conditions, it would; there's no telling what the effects are going to be while in the midst of this unprecedented crisis. Giving banks the ability to raise capital easier leads to higher risk lending by said banks... and if they fail again, the tax payer is on the hook for it. It is now compared to a literal financial coup d'etat
Interestingly, in 1933, the Glass Stegall Act dissolved such bank holding companies to prevent failures on the investment banking side from spreading to the commercial side.
The situation has become so chaotic that there are no reliable economic models to make predictions. There is an eerie silence from those I am accustomed to see make predictions.
In related news, Ambac Financial has been downgraded by ratings agency Moody's, leaving its guaranteed investment contract business short of collateral to meet liabilities.
GM and GE have been added to the list of companies that cannot be "shorted," worrying traders that the bailout may extend to non-financial companies - though in all fairness, GM has forayed into financing through GMAC (ditech.com).
In keeping with Peter Schiff's prediction for the confetti-ization of the dollar, it's down today, with the Euro breaking 1.45. Logic tells us that there will be little interest from foreigners to buy the $2 trillion in debt the treasury will have to sell to put the slime on its books. To raise the $700 billion Paulson's Treasury has to sell treasury bonds to the rest of the world to get the money. Will it buy? It's as if America keeps on burning other people's money, buy their HDTVs and their SUVs, and those poor people out there that are actually doing the work and to save money, so it can all be burnt up by Americans in a gigantic pyre of hubris? The United States are insolvent. This is the mess that Obama will inherit - I hope he does listen to Warren Buffett and keeps the man in his close circle. Very close.
Corresponding with my own prediction of a commodity bubble, gold and crude oil are up. The chants for "Drill, Baby Drill" will become more strident.
To quote the robot from Lost in Space: "Danger, Danger, Will Robinson!"