The high-paying, king-making Wall Street that everyone was once in awe of practically vanished after JP Morgan’s purchase of Bear Stearns in March, Lehman Brothers’ closure in September, and Bank of America®’s acquisition of Merrill Lynch that same time. When the dust had settled, only two were left standing: Goldman Sachs Bank USA and Morgan Stanley.
To prevent a repeat of the same fate as that of their previous three competitors, both banks made the decision to shift from being purely investment banks to bank holding companies, marking the death of the era of investment banking. Gone are the days of high leverage, lucrative returns and $50 million bonuses for company executives.
By subjecting themselves to the oversight of the Federal Reserve, both banks are now expected to exercise more prudence like traditional banks, and less risk-taking, while also being able to gain access to the Fed’s discount window, and accept deposits from retail customers.
The abrupt reinvention of the way they do business may be a relatively painful process for the two financial institutions and taking a quick look at their respective facts and figures might give the public an idea as to which bank is better prepared to deal with the fast-changing financial landscape.
The Figures for Year 2008
Goldman Sachs Bank USA
For the first time ever since going public, Goldman suffered a loss for its fiscal fourth quarter, reporting a $2.1 billion loss, or $4.97 per share. For the same period a year ago, the company reported a $7.01 earning per share.
Even looking at full-year results, the effects of the current crisis still show. For the fiscal year 2008, the firm reported total earnings of $2.32 billion, down from 2007’s $11.6 billion and its lowest reported income since 2002. In the same way, its revenues which totaled $22.2 billion showed a 52 percent dip from the previous year’s $46 billion.
Morgan Stanley ended the year in no better shape. The company reported a fourth quarter loss of $2.36 billion, or $2.34 per share. On the upside, the current loss was way less than 2007’s fourth quarter loss of $3.6 billion or $3.61 a share, when the company had the bulk of its mortgage write-offs.
Taking the whole year into account, Morgan Stanley still ended on a positive note, reporting total earnings for 2008 of $1.59 billion, or $1.54 per share. This figure however, is down from a $3.14 billion or $3.13 a share, in 2007.
A Year Sans Bonuses
Owing to the dismal showing of stocks and drastically reduced revenues for the past year, top executives of both financial institutions have willingly foregone bonuses. This was seen as a welcome move considering the billions of dollars worth of taxpayers’ money that the Fed earlier injected into these banks.
Goldman Sachs Bank USA was the first to announce its “no bonuses” decision for CEO Lloyd Blankfein and 6 other executives. As for Morgan Stanley, this would be the second straight year that CEO John Mack would be doing this, together with the bank’s two co-presidents.
Deposit Base and Network
Goldman Sachs Bank USA
Even before the change to bank holding company, Goldman Sachs Bank USA already had two deposit-taking subsidiaries, Goldman Sachs Bank USA in Salt Lake City, and Goldman Sachs Bank USA Bank Europe PLC. The two make up for about $20 billion in deposits spread out across both continents.
With plans underway of building up the bank’s assets from $20 billion to $150 billion and further growing deposits through acquisitions, it would become the fourth-largest bank holding company in the U.S following Bank of America®, JP Morgan Chase, and Citigroup.
Morgan Stanley Bank, the firm’s industrial bank based in Utah, will be converted to a national bank. The parent company Morgan Stanley has declared that as of August last year, its deposit-taking arm has already about $36 billion in bank deposits in over 3 million retail accounts.
Last October, Morgan Stanley sold 21% of the company in a $9 billion deal to Mitsubishi UFJ Financial Group, Japan’s largest financial company and the world’s second largest bank holding company which holds over $1.1 trillion in bank deposits. In doing so, the bank has joined forces with a strategic partner and has solidified its position in the financial industry.
Morgan Stanley is planning to use its extensive retail presence into growing its banking operations. The firm operates in 33 countries around the world, running 600 brokerage offices, with an approximate employee workforce of over 45,000.
In order to shore up more retailer deposits, financial analysts perceive that the next logical step that these two erstwhile investment banks are going to take is to look into acquiring regional banks which could definitely give a boost to their consumer banking franchises.
With more banks expected to face more financial troubles in view of the current credit crisis, even some of the country’s bigger banks and thrifts, both Goldman Sachs Bank USA and Morgan Stanley will have more opportunities to bulk up at relatively cheaper acquisition costs.