I just saw this article, and I realized that like many of our ordinary conceptions, the idea of a ‘bank’ has morphed significantly over the last few months:
The Fedâ€™s approval for American Express was similar to the decision it made in September to transform the countryâ€™s two biggest investment banks, Goldman Sachs and Morgan Stanley, into bank holding companies.
That move bolstered the two institutions after the collapse of another investment bank, Lehman Brothers, which became the largest bankruptcy filing in history. Goldman Sachs and Morgan Stanley gained the ability to borrow federal money and build a stable base of deposits in hopes of reassuring investors and other banks.
As I have mentioned, I am now unfortunately bearish in the short-term as the dislocations in the credit markets continue to wreak havoc on securities prices, in addition to the fact that the economic slowdown is only just beginning.
One stat that really jumped out at me during my meetings in NYC a little over a week ago was that 65-80% of all corporate borrowing over the last few years came from non-bank entities.
Granted, many of these entities were SIV’s which had the implicit backing of big banks like Citi; however, a good deal of this issuance came from CDO’s, CLO’s and other non-bank entities, which are no longer able to lever-up to buy the assets they have been gobbling over the last few years.
Unlike Amex, Goldman, and Morgan Stanley, these hundreds or thousands of entities will not be saved by the Fed, and as long as they continue to contract to deal with stiffer margin requirements and/or investor liquidations, the selling pressure in the credit markets should continue.
The list of government interventions over the last few months has been too staggering to keep up with, but most smart people I know expect it will continue.
I continue to be a long-term optimist. But don’t be surprised if we have more bad days in the markets between now and then.
Looking back years from now concepts like ‘banks’, ‘hedge funds’, and many others will likely look very different than they did only a few months ago. Thankfully, our language is flexible enough to support these changes, and hopefully our decision-making will keep pace (On Language and Decision Making).