Is Goldman And Morgan On Right Track ?

Goldman Sachs Group Inc. and Morgan Stanley have transformed themselves into bank holding companies. The change in status allows the last two major independent investment banks on Wall Street to take advantage of different accounting rules, gives them more access to federal funds and buys them time to stabilize their funding base by acquiring deposits.

The move was aimed to improve market confidence. The move provides Goldman with time to continue the process of de-risking itself to a level deemed suitable by the market. Instead of carrying all of their loans, bonds, stocks and other assets at market value, as investment banks are required to do, the two New York-based firms can now avoid further write-downs by moving some assets into their banking units. They will also gain the ability to borrow from the Federal Reserve indefinitely.

Morgan Stanley plans to sell as much as 20 percent of the firm to Tokyo-based Mitsubishi UFJ Financial Group Inc. for $8.4 billion. Goldman has no immediate plans to raise capital, although it may decide to if it finds attractive investment opportunities.

Morgan Stanley’s deposits amounted to about 4 percent of the firm’s liabilities at the end of August, while Goldman’s amounted to 2 percent of liabilities, which are relatively very low. At larger banks, deposits typically account for between 40 percent and 60 percent of liabilities.

Goldman Sachs, now the fourth-largest U.S. bank by market value, is more interested in buying deposits than in buying entire banks. The firm sees opportunities to buy deposits in the wholesale market and also to buy deposits of failed institutions, such as IndyMac Bancorp Inc., that are under the control of the Federal Deposit Insurance Corp.

In return for the advantages accorded by their new status, Goldman and Morgan Stanley won’t have to change much about the way they operate. Neither firm is being required to dispose of non-financial assets, such as commodities or stakes in companies, that banks normally are prohibited from owning, for at least two years, according to the Federal Reserve orders.

Efforts by the companies to reduce their so-called leverage, or ratio of assets to shareholder equity, are more about trying to reassure markets than to meet any requirements imposed by the Fed.

Both charts look pretty much identical. The fundamental question to ask here is with this transformation, is Goldman Sachs and Morgan Stanley on the right track. Is this the time to buy them ? Both have shred off a-lot of points but still pose down-side risk as investors lost confidence that a proposed U.S. $700 billion government bailout would solve the industry’s bad-debt problem. Its better to keep watching and stay on side-line on this one.