The Death of Investment Banks

At the beginning of 2008, there were 5 major investment banks: Bear Stearns, Merrill Lynch, Lehman Brothers, Goldman Sachs, and Morgan Stanley. What set these 5 banks apart from conventional banks was that they did not accept or solicit bank deposits, the kinds of deposits insured by the Feds through the FDIC insurance program. These banks raised capital for other companies, made markets in stocks and bought and sold securities of all types. In return for not accepting deposits as commercial banks do, for their entire history they have been subject to significantly less regulation than the banking sector. This is primarily due to the fact that the banking sector has had more of a responsibility to the public trust. That was until Sun night 9/21/08.

Things have changed. All 5 banks are different now than the investment banking entities they used to be.

1) Bear Stearns, acquired by JP Morgan Chase and subject to stiffer merchant and commercial banking regulations.
2) Merrill Lynch, acquired by Bank of America and subject to stiffer commercial banking regulations.
3) Lehman Brothers, filed for bankruptcy protection and liquidation
4) Goldman Sachs, allowed by the Federal Government to accept deposits and convert into a commercial bank in order to stay alive and be subject to stiffer commercial banking regulations.
5) Morgan Stanley, allowed by the Federal Government to accept deposits and convert into a commercial bank in order to stay alive and be subject to stiffer commercial banking regulations.

Yesterday, the decision on Goldman and Morgan, the last 2 remaining investment banks made it official that no independent and lesser regulated investment banks are going to remain on Wall Street.

How this will affect companies trying to use the public markets to raise capital through the issuance of stocks or bonds remains to be seen but suffice it to say, it will be different.