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Wall Street is history

Wall Street is history. Official.

The news from New York that Wall Street's last two investment banks Morgan Stanley and Goldman Sachs are to convert into tightly regulated bank holding companies marks the end of an era for the capitalist economic system. The investment banking model that for decades has powered a global boom in leveraged finance, exotic structured products and tech-driven investment strategies is kaput.

Can it be long before the industry 'regulator' the Securities and Exchange Commission gives up the ghost as well?

And what about the technology industry? With Goldman and Morgan Stanley joining the ranks of banks, the chase for scarce retail deposits will hot up. Further global consolidatiion is inevitable: Mitsubishi has already moved to buy a sizeable stake in Morgan Stanley. Goldman Sachs too will look to build its deposit base through acquisitions. Bigger will inevitably be better.

Core banking systems vendors and IT integration specialists will be licking their lips at the prospect. Further down the line, the new breed of vendors hawking Web 2.0 technologies for servicing and cross-selling to retail banking customers will also stand to profit.

But perhaps the most extraordinary aspect of the latest shock news from the US - and the most worrying for those of us who fear for the future safety of the financial services industry - is that the US Government is doing the exact opposite of what it did in the years that followed the last Great Crash of 1929 when it formally seperated investment banking from retail banking under the Glass-Steagall Act. The legislation was put in place to protect retail deposits from the risk-taking excesses of the wholesale markets.

The steady erosion and then ultimate repeal of Glass-Steagall in 1999 created inextricable linkages between commercial and investment banking, which in turn led to the rise of the too-big-to-fail universal bank. The systemic shockwaves currently rocking the financial system in part emanated from the removal of the Glass-Steagall restrictions back in the late 90s.

We do indeed live in strange and interesting times.


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Paul Penrose

Paul Penrose

Head of Research


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06 Oct 2006



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