Mike the Usurper wrote:

The Federal Reserve said Sunday it had granted a request by the country's last two major investment banks — Goldman Sachs and Morgan Stanley — to change their status to bank holding companies.

The Fed announced that it had approved the request of the two investment banks. The change in status will allow them to create commercial banks that will be able to take deposits, bolstering the resources of both institutions.

This is the death knell for the markets. What Morgan and Goldman will do in the morning is call their holders who have substantial holdings in their accounts and say to them, "We expect the current downturn to continue, and recommend that you place $100K into a commercial account with us now that we have this nice commercial bank attached. That amount will be FDIC insured, 100% protected, and we'll even give you a nice interest rate on the deposit." Their customers, scared out of their gourds by last week, will do so and the move will make the downward prediction self fulfilling.

This is a sound individual move for Morgan and Goldman, it shores up their liquidity problem, their cash holdings increase, but a disastrous move for the markets at large as the money flows out of the markets and is not reinvested in something else in the markets. It is an outflow with no corresponding inflow. It's a trigger event for 1-800-RUN.

Stack on top of it the current refusal (and wisely so) to hand a blank check to the White House on how to resolve the market crisis, and you have a recipe for catastrophe. It should not be as enormous a wreck as handing over the black check, but buckle up.

That's not exactly true. Those $100K deposits have to go somewhere, and now that the gubment has done enough cleanup to maintain money-market accounts at par value (rather than their discounted value last week), then those deposits will come back into the market. It will probably be an inflow of capital into sectors that already don't need it (t-bills, gold, muni bonds, etc) but it's not like it will be a giant sucking sound that doesn't have an echo.

It's amazing to me how virally susceptible the financial system was and with this new sculpting, it appears it will be even worse, not better. Is there ANY long term planning associated with Wall Street or the Fed?

flynn23 wrote:
That's not exactly true. Those $100K deposits have to go somewhere, and now that the gubment has done enough cleanup to maintain money-market accounts at par value (rather than their discounted value last week), then those deposits will come back into the market. It will probably be an inflow of capital into sectors that already don't need it (t-bills, gold, muni bonds, etc) but it's not like it will be a giant sucking sound that doesn't have an echo.

It's amazing to me how virally susceptible the financial system was and with this new sculpting, it appears it will be even worse, not better. Is there ANY long term planning associated with Wall Street or the Fed?

In this case, I think it is that sucking sound. The issue is, as a commercial bank, they'll no longer be able to hold at the 2-3% cash holding they've been operating at, and will have to go back to 10-12% cash holdings. That means the money will not be reinvested because it needs to be held for depositors/margin calls. It won't go back into one of the other areas because it can't.

Mike the Usurper wrote:

flynn23 wrote:
That's not exactly true. Those $100K deposits have to go somewhere, and now that the gubment has done enough cleanup to maintain money-market accounts at par value (rather than their discounted value last week), then those deposits will come back into the market. It will probably be an inflow of capital into sectors that already don't need it (t-bills, gold, muni bonds, etc) but it's not like it will be a giant sucking sound that doesn't have an echo.

It's amazing to me how virally susceptible the financial system was and with this new sculpting, it appears it will be even worse, not better. Is there ANY long term planning associated with Wall Street or the Fed?

In this case, I think it is that sucking sound. The issue is, as a commercial bank, they'll no longer be able to hold at the 2-3% cash holding they've been operating at, and will have to go back to 10-12% cash holdings. That means the money will not be reinvested because it needs to be held for depositors/margin calls. It won't go back into one of the other areas because it can't.

ahh.... good point.