WASHINGTON (Reuters) – Goldman Sachs and Morgan Stanley sought shelter with the Federal Reserve to survive a financial storm that destroyed their rivals, effectively killing Wall Street’s investment banking model of the past two decades.
The move is Washington’s latest effort to restore calm to chaotic markets and follows frantic talks between the Bush administration and Congress on a $700 billion bailout to prevent the crisis from pushing the economy into severe recession.
By agreeing to much tighter Fed regulation as bank holding companies, Goldman Sachs Group Inc and Morgan Stanley moved to avoid the fate of rivals that either collapsed or were taken over in the worst financial crisis to sweep Wall Street since the Great Depression.
U.S. stock futures were indicating a lower opening on Wall Street, while European stocks edged higher, the dollar fell and U.S. Treasury debt prices edged up as investors played it safe before the mechanics of the plan are worked out.
“We need to see more details from the rescue package. What is missing is the price the U.S. authorities are going to pay for the toxic assets,” said Heino Ruland, analyst at FrankfurtFinanz.
Goldman and Morgan Stanley shares traded in Frankfurt down around 6 percent.
The rescue had been cobbled together last week after panic-stricken investors drove Lehman Brothers Holdings Inc to bankruptcy, Merrill Lynch & Co Inc into the arms of Bank of America Corp and insurer American International Group Inc (AIG) to nationalization.
With Bear Stearns collapsing earlier this year, Goldman and Morgan Stanley were the last surviving of the big five investment banks which shaped 20 years of Wall Street history, partly by taking greater risks than their Fed-regulated rivals were allowed to.
In return for tighter regulation, Goldman and Morgan Stanley would gain greater access to central bank funds and would find it easier to buy retail banks.
“It creates a perception of greater safety and supervision,” said Chip MacDonald, mergers partner at law firm Jones Day.
After the Fed move, a mooted merger with banking group Wachovia Corp was no longer Morgan Stanley’s priority, a person familiar with the negotiations said.
Elsewhere Japan’s biggest brokerage Nomura Holdings Inc is to buy the Asian operations of Lehman, a source with direct knowledge of the deal said.
In Europe Nomura and Britain’s Barclays Plc have pitched bids for parts of Lehman’s business, as administrators seek to save as many jobs as possible.
Barclays is interested in Lehman’s European equities businesses, a person familiar with the matter said. That could include 1,000 to 1,500 bankers and support staff, mostly in London.
AIG’S former chief executive Robert Willumstad has rejected a $22 million severance payment, the Wall Street Journal reported, adding that major shareholders concerned about the government takeover were planning to meet on Monday to discuss alternatives.
Lehman’s collapse shattered investor confidence and threatened to rupture the global financial system, battering stock markets around the world before the bailout plan sparked a rebound on Friday which added more than $1.5 trillion to the value of stocks around the world.
The largest-ever bank rescue would give sweeping powers to the U.S. Treasury to buy up toxic mortgage-related debt from financial groups, including U.S. subsidiaries of foreign banks.
STOP THE BLEEDING
Democratic leaders in Congress promised swift action but also want to throw a lifeline to homeowners, not just Wall Street.
With the economy the No. 1 issue in an election less than six weeks away, lawmakers are striving to get a plan in place by the end of the week, fearing delay could again send markets reeling.
Two key questions remained unanswered even after Treasury Secretary Henry Paulson appeared on four television talk shows to press his case for emergency action: what price will the United States pay for these bad debts? And when will it start buying them?
Paulson cast the proposed market intervention as a lesser evil, arguing the consequences of inaction would be so dire that the large burden on taxpayers would be worth it.
“This is not something that we wanted to do. This was something that was very necessary,” Paulson said on the NBC Sunday program Meet the Press. “We did this to protect the taxpayer.”
Democrats, who control both chambers of Congress, began to swap proposals with the Treasury, including suggested checks on the nearly unfettered power the administration sought for the Treasury secretary.
“Democrats believe a responsible solution should include independent oversight, protections for homeowners and constraints on excessive executive compensation,” said California Democratic Rep. Nancy Pelosi, speaker of the House of Representatives.
As negotiations got under way, both the Democrats and the Republicans predicted lawmakers would quickly resolve their differences and were likely to pass a bill by week’s end.
$15,000 PER FAMILY
Paulson said the final cost of the bailout should fall well short of the $700 billion initial price tag since the government would be able to hold the debt until markets stabilize and prices recover. “This is the least costly path,” he said.
To cover the cost, Treasury asked Congress to raise the government’s debt limit to $11.3 trillion from $10.6 trillion.
A $700 billion fund would come on top of other steps already taken by the U.S. authorities and would push the total pledged to combat the crisis to $1.8 trillion, or $15,000 per U.S. household.
The plan would even let the Treasury buy assets from nonfinancial firms and assets not tied to mortgages if it helped promote market stability.
Paulson confirmed, however, that hedge funds — investment vehicles for the wealthy — would not be eligible.
“We have a global financial system and we are talking very aggressively with other countries around the world and encouraging them to do similar things, and I believe a number of them will,” Paulson said on ABC.
Lawmakers said Paulson and Fed Chairman Ben Bernanke had offered starkly grave assessments of the economic cost of inaction in private briefings.
“What they told us was the contagion here and the depression in the market was such that you were going to see a shutdown of the lending businesses not just on Wall Street”, but for all Americans, Barney Frank, chairman of the House Financial Services Committee said on CBS.
By Kevin Drawbaugh and Mark Felsenthal
(Additional reporting by Nancy Waitz, Tom Ferraro, John Poirier and Emily Kaiser in Washington; Kristina Cooke and Richard Leong in New York and Jessica Hall in Philadelphia; Blaise Robinson in London; Writing by Tomasz Janowski; Editing by Dayan Candappa and David Holmes)