Ziggy Stardust said we have five years until the Earth was doomed for destruction. For Goldman Sachs and Morgan Stanley, it is yet unknown how long the seismic change from broker-dealer to holding company will have any effect on their businesses.
On September 21, 2008, Goldman Sachs Group became a bank holding company, allowing it cheaper access to funding following the collapse of Lehman Brothers. In terms of regulation, this meant that GS moved under the auspices of the Federal Reserve. Prior to this date, Goldman was subject to regulation by the SEC, as a Consolidated Supervised Entity (CSE).
However, the firms principal U.S. broker-dealer, GS&Co., remains subject to regulation by the SEC. This means both the Fed and the SEC are responsible for regulating GS. This is great for GS, as good quarterly results mainly due to the money received through AIG means that both regulators will probably forget about GS for the time being.
Regarding making any changes from investment to commercial bank, GS stated in its annual report that: The firm is currently working with the Federal Reserve Board to put in place the appropriate reporting and compliance mechanisms and methodologies to allow reporting of the Basel I capital ratios as of the end of March 2009.
Phased in over time? The small print continues:
In addition, the firm is currently working to implement the Basel II framework as applicable to it as a bank holding company (as opposed to as a CSE). U.S. banking regulators have incorporated the Basel II framework into the existing risk-based capital requirements by requiring that internationally active banking organizations, such as Group Inc., transition to Basel II over the next several years.
According to an article in The Financial News, neither Goldman Sachs or Morgan Stanley will have to make any changes to their business until September 2010, after which they have the option to opt out of any regulatory restrictions until September 2013.
So while regulators and non-governmental bodies try to clamp down on the financial sector, the stalwarts of Wall Street have a nice leisurely stroll towards regulatory obedience. Even when the Fed gets round to implementing new regulation, it is likely Goldman Sachs and Morgan Stanley can ignore most of these restrictions, due to the difficulties in changing from investment to commercial. In the mean time, both can continue as if nothing happened to the investment-banking model.
Thank god the anti-capitalist protesters never read the small print.