Only a year ago, pundits were predicting that investment banks needed a permanent funding base. Experts predicted that Goldman Sachs and Morgan Stanley, the only two surviving bulge brackets, would either merge with a large commercial bank or start collecting deposits themselves. Their inherently flawed business models would need to undergo a paradigm shift.
In reality, the investment banks changed only what was necessary to survive the crisis. Goldman and Morgan, now bank holding companies, are back to business as usual. Although there is a public outcry against bonuses that are almost back to pre-crisis levels, a look at the two banks’ funding and leverage shows that there is no fundamental change in how they run their business.
Goldman Sachs increased its deposits to around $42 billion in March, up from around $28 billion at the end of 2008. But its deposits have not grown since March. Morgan Stanley’s deposits grew to nearly $60 billion the first quarter this year, up from roughly $35 billion in August 2008. But the dramatic growth faded as the pressure waned.
The two brokers’ reliance on short-term funding is back to pre-crisis levels. At Goldman, 43 percent of $350 billion trading assets are financed from the overnight repo market now, higher than the 39 percent level in second quarter of 2008. Morgan Stanley is relying on the repo market for 50 percent of its $350 billion trading assets, the same level it reached during the second quarter of 2008, according to a report by Jonathan Glionna, a credit analyst at Barclays Capital.
The leverage for both brokers (defined as total assets divided by shareholder’s equity) has stayed low after reaching a peak for Goldman at 28 times and Morgan at 33 times at the beginning of 2008. Since the fourth quarter last year, leverage was stable at 13 times at Goldman and 15 times at Morgan. But Glionna expects Barclays’ leverage to increase once the wide bid-ask spreads in capital markets narrows, possibly sometime next year.
Will there be another financial tsunami that puts the independent broker model to a final test? If no decisive action from the regulators is taken, then failure is inevitable. Unless, of course, Uncle Sam decides to put taxpayers on the front line again.
Xiang Ji (Nina) is the capital markets reporter at Institutional Investor, covering mergers and acquisitions, debt and capital markets from an institutional investor’s perspective. Xiang Ji was formerly with BusinessWeek in China covering the wider business world. Send email to capitalbeat@iimagazine.com.
