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Bye bye bulge-bracket

  • Robert Peston
  • 22 Sep 08, 09:43 AM

That the last two bulge-bracket firms standing, and , have become is extraordinary.

Trader watching shares boardIt is precisely the opposite of what happened after the Great Crash of 1929.

Back then, the US government decided that the best way to protect US citizens' savings was to prevent investment banks having access to those retail savings.

So investment banks which engaged in what was perceived as high-risk securities trading and underwriting were banned from taking insured retail deposits, under the Glass-Steagal Act of 1933.

That prohibition was removed on 12 November 1999 - and since then there has been a rapid convergence between commercial banking and investment banking.

The preferred new banking model became the universal bank, typified by Citigroup, with its mixture of retail banking, commercial banking and investment banking.

The universal model hasn't been an unalloyed success: Citi and UBS, to name just two, have lost colossal sums on their subprime-related investments, imperilling their depositors (though both have survived).

Even so, in the wake of the credit crunch, the new orthodoxy is that all investment banks must have access to retail deposits.

Why? Well this is where it becomes a touch surreal.

First, retail deposits are supposed to be stickier. Or to put it another way, you and I are less likely to panic en masse and withdraw our savings at the first whiff of trouble at our banks.

Banks are counting on our inertia for their survival. Which is not altogether reassuring.

Second, the political and economic fallout from any damage to our savings is such that retail banks that take our deposits receive much greater protection from the authorities than banks that don't look after the public's savings.

In the US context, for example, there's the official insurance provided for deposits. And, more importantly, there's access to the Federal Reserve for day-to-day and emergency funding - which Goldman and Morgan Stanley will be able to access in full, now that they are formal "Federal Bank Holding Companies".

So the conversion into banks by Goldman and Morgan may perhaps be redolent of the greatest failure of global financial regulation over the past decade or so.

The original separation of investment banking and retail banking was designed to prevent ordinary savers from being damaged by the collapse of a Goldman Sachs or a Morgan Stanley.

But Goldman Sachs and Morgan Stanley have been permitted to grow so enormous, and other banks which look after our savings have become so inextricably dependent on them, that even they are now too big to be allowed to fail.

Just a week ago, the US Treasury took a big risk and allowed Lehman to fail.

Since then, the repercussions have almost brought the US, the world's biggest economy, to its knees.

The collapse of Lehman is what - in part - has led to all money-market funds being insured at an incremental cost to the taxpayer of $400bn and to the US Treasury's proposal to spend $700bn on buying distressed mortgage and other assets.

So the attitude of the Treasury and of the Federal Reserve, the US central bank, is that it would be better to allow Goldman and Morgan to become formal banks - benefiting from the full protection of the US government - than to sustain the illusion that they could be allowed to collapse.

But Morgan Stanley's claim that its conversion into a federally insured bank will not lead to "limitations on its activities" will doubtless be viewed by some US politicians as contemptible.

Now that the US taxpayer is in a formal sense underwriting Goldman and Morgan Stanley, their days of buckling the swash on the worldwide high seas of finance are over, possibly for good.

Credit-crunched Gordon Brown

  • Robert Peston
  • 22 Sep 08, 07:52 AM

As a biographer of Gordon Brown and a former FT political editor, I have kept a fairly close eye on our prime minister and on for many years. So, for me, there were a number of jaw dropping moments in his .

Gordon BrownThese are they, in no particular order.

1) He said this was a moment in which it was "right" for the government to borrow a good deal more. Well, needs must. The credit crunch and the associated economic slowdown are hammering tax revenues.

In the absence of cuts in public spending, public borrowing next year could be well over 6% of GDP, way above anything we've seen since the early 1990s. The Treasury itself is in something of a funk about the outlook for the public finances.

But the prime minister is positioning his party as the defender of expenditure on public services in these straitened credit-crunched times. He's preparing for a punch-up with the Tories, whom he'll doubtless attack as ruthless plunderers of schools and hospitals. This is where he wants to draw the battle line for the next general election.

But there will be a cost to him. If Brown stood for anything as chancellor it was for prudence and fiscal rectitude. It's goodbye to all that.

2) In the Marr interview, Brown took personal credit for the initiative to clamp down on short-selling, even though the decision to impose restrictions on speculators who profit from falls in share prices was actually taken by the City watchdog, the .

It's slightly dangerous for him to undermine the perceived independence of a watchdog he created. Why? Well the FSA didn't cover itself in glory in its regulation of Northern Rock. Is the prime minister now taking responsibility for the FSA's failure to properly assess the risks being run by the Rock? Is he saying that calamity was his fault?

3) Brown said that the current financial crisis was in large part due to the absence of a global regulatory system - and that he had been rebuffed for years by foreign governments in his attempt to construct such a system.

I can only assume that here he's referring to his longstanding attempts to reform the so that it could give a louder "early warning" when imbalances are building up in the financial system.

Now there are two things to say about this. First, there were very loud warnings being made about the credit bubble that was being created - by the central bank's bank, the , for example. These were largely ignored in finance ministries, including the Treasury.

Second, there will be wry amusement in Brussels and throughout the eurozone about Brown's claims that he was the champion of more integrated regulation across borders - because for years he and the Treasury battled successfully to prevent tighter Europe-wide regulation of financial services.

Brown was defending the interests of the City. It may well have been the right thing to do. But given the current crisis, the eurozone's less laisser-faire governments will insist that they were right and he was wrong.

4) While we're on about the interests of the City, another part of the Brown brand has been that he would defend our financial services industry more-or-less to the death. Yesterday, with the reputation of big-bonus bankers now on a par with Attila, he put the boot in (although he claimed still to be "pro business" and "pro markets").

That may be good short term politics. But another little bit of what defined him has died.

Also there are still some countries where investment banks, hedge funds and private equity firms aren't perceived as leprosy carriers. If they're on the receiving end of much more opprobrium from the British authorities, there'll be a substantial exodus of them.

Many may say good riddance - unless and until they notice that a big chunk of what has been generating our economic growth has relocated to Switzerland.

5) Brown said that the 拢100bn of hard-to-refinance mortgage assets that our banks have swapped for Treasury bills, via the , is an attempt to "reignite the mortgage market" so that there's both "competition" and "fair prices" for borrowers.

This was a particularly odd claim. If he really believes that's what the scheme was about, then he would have to acknowledge it's been a total flop, since the mortgage market is flatter than a pancake.

But actually, as the Bank of England has made crystal clear, the point of the Special Liquidity Scheme was not to revive the mortgage market. It was to provide liquidity to cash-strapped banks, to prevent any more of them falling over.

If anything, what strikes me most about these remarks is what it may show about his loss of a sure touch when discussing complex but important financial issues.

Anyway, there's more that could be said about the prime minister's re-making of himself (which by the way he and his advisers perceive as a great success). But I'm exhausted trying to fathom the new Brown, so that'll do for now.

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