And Then There Were None: The End of Independent Investment Banking Firms in the United States

As we have chronicled on this Blog, the days of independent investment banking firms were numbered with the repeal of Glass Steagall.  (This is discussed at length in The "Great Fall": The Consequences of Repealing the Glass-Steagall Act) Once commercial banks were allowed to invade investment banking, their superior competive advantage (better funding sources, particularly deposits, and regulatory oversight that was more trusted by the market) would eventually result in their seizing control of the investment banking sector of the market.

We watched as Bear Stearns and Merrill were acquired by commercial banks and Lehman filed for bankruptcy.  Morgan is in negotiations with Wachovia.  But in the meantime, the last two independent investment banks, Morgan and Goldman, have converted over the weekend to bank holding companies.  The consequences?

• With the move, Wall Street as it has long been known -- a coterie of independent brokerage firms that buy and sell securities, advise clients and are less regulated than old-fashioned banks -- will cease to exist. Wall Street's two most prestigious institutions will come under the close supervision of national bank regulators, subjecting them to new capital requirements, additional oversight, and far less profitability than they have historically enjoyed.

In the short term, there will be no real funding advantage.  The main reason for the shift is for Goldman and Morgan to announce loudly that they are subject to the regulation and protection of the Federal Reserve Board.  This will likely provide the market additional confidence and provide both firms with additional time to develop a longer term strategy that will necessarily involve their paring with a commercial bank.