A Bank Closure, a Bailout and the Rebirth of Goldman Sachs and Morgan Stanley

Historic Week Ends With Flurry of New Activity in Financial Services Industry It was another frantic weekend in the financial services industry, as one bank closed, two financial giants were reborn, and the Bush Administration proposed a historic $700 billion bailout plan for troubled institutions.

Financial markets had just begun to settle a bit after last week's dramatic events on Wall Street. But then, starting after Friday's closing bell and continuing into Sunday evening, came news that:

Ameribank Inc., a $115 million asset bank in Northfork, West Virginia was closed by its federal regulator, the Office of Thrift Supervision (OTS);
The U.S. Department of Treasury asked Congress for the authority to purchase $700 billion of troubled assets (mainly poorly performing mortgages) from financial institutions to help stabilize the nation's markets and economy;
Federal regulators converted the last two big investment banks - Goldman Sachs and Morgan Stanley - into bank holding companies, allowing them to buy other retail banks and more readily borrow money from the Federal Reserve Bank.

12th Bank Closure of 2008
Ameribank is now the 12th U.S. bank closed so far this year. The FDIC was appointed receiver and was able to arrange for its deposits, both insured and uninsured, to be acquired by Pioneer Community Bank and Citizens Savings Bank.

The OTS says Ameribank's troubled state was due to "excessive growth" in construction rehabilitation loans that gave financing to rehabilitate distressed properties in low-to-moderate income housing markets.

Historic Bailout
Treasury's bailout request is on top of an $85 billion emergency loan to insurance giant American International Group. Last week's news of Lehman Brothers filing for bankruptcy and the takeover of Merrill Lynch by Bank of America saw world stock markets plummet into record sales and losses. The $700 billion purchase is seen as a much-needed shock absorber, as banks continue to reel from the shaky mortgage lending marketplace. Regulatory oversight for this purchase would happen in the form of reports to Congress every six months.

Treasury Secretary Henry Paulson called on Congress to move swiftly on this request. "We need this to be clean and quick," Paulson said on ABC's "This Week." Paulson's comment echoes that of Federal Reserve Chairman Ben Bernanke and other federal officials who have been quoted recently that the lack of easy credit between banks and other financial institutions may seriously hurt the nation's economy if not addressed quickly. Treasury's legislative proposal is being called the most sweeping economic intervention by the federal government since the Great Depression.

And Then There Were None
The conversion from investment banks to more traditional bank holding companies will help Morgan Stanley and Goldman Sachs try to reestablish customer and investor confidence -- the key issue to address during recent days. The conversion also takes off the bull's eye that investors and customers had placed on them. Both firms remember that nervous investors' selloffs earlier this year took down Bear Stearns, Lehman and Merrill. Both Morgan Stanley and Goldman Sachs had seen their shares take a nose dive last week, prior to the announcement of the $700 billion bailout.

As bank holding companies, both firms now face a great deal more regulatory oversight of their operations - a new challenge on top of the formidable business challenges they already face.

The FBI says it is investigating Lehman Brothers, Fannie Mae, Freddie Mac and AIG and the top executives at those firms in part of a wider probe into possible mortgage fraud in the industry. Sources at the federal law enforcement agency say the bureau does not speak about ongoing investigations but note 26 firms are included in the inquiry.

Earlier on September 16, FBI director Robert Mueller told Congress that 1,400 individual real estate lenders, brokers and appraisers were now under investigation in addition to two dozen corporations. Mueller knows these types of investigations well, while working as an assistant attorney general in charge of the Justice Department's criminal division in the early 1990s, he oversaw DOJ's probe into BCCI, which uncovered the international bank's involvement with numerous criminal activities including money laundering and terrorist support.

All of these events together - the bank closing, bailout and conversions -- create a historic shift in the way investments and banking will be conducted in the future. Investors and analysts are also focusing on troubled retail banks Wachovia and Washington Mutual, which are facing similar investor confidence issues and lending problems. Industry analysts expect even more changes in the banking industry topography before year's end.


About the Author

Linda McGlasson

Linda McGlasson

Managing Editor

Linda McGlasson is a seasoned writer and editor with 20 years of experience in writing for corporations, business publications and newspapers. She has worked in the Financial Services industry for more than 12 years. Most recently Linda headed information security awareness and training and the Computer Incident Response Team for Securities Industry Automation Corporation (SIAC), a subsidiary of the NYSE Group (NYX). As part of her role she developed infosec policy, developed new awareness testing and led the company's incident response team. In the last two years she's been involved with the Financial Services Information Sharing Analysis Center (FS-ISAC), editing its quarterly member newsletter and identifying speakers for member meetings.




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