Bailout debated; investment bank model abandoned
Written on September 23, 2008
Wall Street braced for a week of political wrangling over a proposed $700 billion bailout for troubled banks, while Goldman Sachs and Morgan Stanley sought shelter with the Federal Reserve to survive a financial storm that destroyed their rivals.
Morgan Stanley went a step further and struck a deal with Japan’s largest bank, Mitsubishi UFJ Financial Group, which agreed on Monday to buy up to a 20 percent stake in the prestigious 73-year-old investment bank, sending Morgan Stanley shares up 10 percent in morning trading.
As the crisis reverberated across the globe, the Group of Seven finance ministers and central bank governors said they were maintaining “heightened close cooperation” to safeguard the international financial system.
The Fed’s agreement to convert the once high-flying Wall Street investment banks into more conventional depositary institutions was Washington’s latest effort to restore calm to chaotic markets. It followed frantic talks between the Bush administration and Congress to prevent the crisis from pushing the economy into severe recession.
The agreement announced late on Sunday effectively scraps the investment bank model synonymous with Wall Street, ensuring Goldman Sachs Group Inc and Morgan Stanley avoid the fate of rivals that either collapsed or were taken over in the worst U.S internet payday loans. financial crisis since the Great Depression.
Both will face a thicket of new regulations, including the capital requirements that have insulated conventional banks from the year-old credit crisis. The changes will bolster their resources but also curb the spectacular profit growth that have made investment bankers among the highest paid in the nation.
Markets remained skeptical. The Dow Jones industrial average was down 1.8 percent on uncertainty over the proposed $700 billion financial sector bailout, the nation’s largest-ever bank rescue.
Two key questions remained unanswered even after U.S. Treasury Secretary Henry Paulson appeared on four television talk shows on Sunday to press his case for emergency action: What price will the government pay for these bad debts, and when will it start buying them?
Filed in: management.