- Over the weekend Goldman Sachs and Morgan Stanley abandoned traditional investment banking and brokerage models to become traditional banks.
- The emergency federal plan to stem the financial crisis was debated in Congress with several concessions on both sides. Once implemented, the plan's success or failure and total price tag will take years to evaluate.
- The plan boosts political uncertainty. Until a new administration forms, we don't know what policies will reign, but we know they'll likely impact markets directly.
- Prognosticators are rushing to forecast the new landscape, but investors don't need to get the details right to know sitting tight is the best course of action for now.
Picking up where we left off last week, game-changing headlines continued apace over the weekend and into Monday. Late Sunday, the Fed approved bids by Goldman Sachs and Morgan Stanley (the last two of Walls Street's five investment banking/brokerage giants still standing) to become traditional bank holding companies—essentially commercial banks under direct Fed supervision. Simultaneously, the emergency government plan to address the financial crisis, announced late last week, began pushing its way through Congress. The plan has yet to be passed, but will likely be viewed by lawmakers as politically vital and too urgent to debate for long.
Many have hastily equated the $700 billion spending limit requested by Treasury Secretary Paulson to the plan's overall price tag. But it should be noted that number is so far a proposed cap and the money would be used to buy assets which still have some value, no matter how illiquid they are currently. The government would hold those assets until the open market unfreezes and then sell them back to investors. It's therefore unlikely the entire $700 billion will be lost (if all of it is even approved or used). The plan's final cost would depend primarily on how the securities are priced and how aggressively they are disposed of later on.
Meanwhile, as we hash out the details, not a few have seized the opportunity to be the first to forecast the new landscape. Some going as far as to proclaim US capitalism dead, replaced by a loathsome brand of socialism lacking any of the so-called benefits the enviable French enjoy.
Despite overwrought lamentations of America's fall from grace, we think it's far too early to know for sure how it will all play out. For example, AIG effectively remains under the government's shadow for now, but who knows how long that will last. Commercial banking appears to have gobbled up its riskier cousin. But again, it could be that Morgan Stanley and Goldman continue along in much the same way they have in the past, albeit following the Fed's stricter rules regarding leverage and capital. And new players could yet revive the business model. Similarly, Paulson's plan to bail out mortgage-backed securities is massive in scope, but it might be modified while passing through Congress. Once implemented, the plan's success or failure and total price tag will take years to evaluate.
One thing has become certain: Uncertainty rules. Not only are the ramifications of government moves unknown, but it's becoming ever more likely the feds will retain control of huge chunks of assets and entire companies well into the next presidential administration. That means high uncertainty today—we don't know who the next president or the members of his cabinet will be and therefore can't easily predict what policies will reign. Will assets be quickly sold and re-privatized, or will they linger under federal control for many years to come? Impossible to say right now. It's very unlikely Henry Paulson, for instance, will even be at the wheel in six months.
We'd like to again emphasize: Now is not the time to be hasty. There are too many variables, moving too quickly. We understand that some prognosticators find it necessary to put an indelible stamp on history as early as possible. And some will be spot on, while others are sure to be wildly off the mark. Investors, on the other hand, need not make history to make a long-term profit—and sometimes that means sitting tight. Please see our recent commentaries "Wall Street's Wild Spirits," "Weekend at Lehman's," and "Today, Resolve Trumps Timing" for more.