End of an era

From today's NYT:

"The transformation of Wall Street picked up pace on Monday as Goldman Sachs and Morgan Stanley, the last big independent investment banks, moved to restructure into larger, less risk-taking organizations that will be subject to far greater regulation by the Federal Reserve.

The changes came after Goldman and Morgan Stanley on Sunday night received permission from the Federal Reserve to become bank holding companies. The change means they will be able to finance their activities with insured deposits but in return must reduce the amount they can borrow to make the kind of big trading bets that drove huge profits, and massive bonuses for executives, over the last several years of Wall Street’s latest Gilded Age.

Morgan Stanley moved quickly into the new era on Monday, announcing that it planned to sell up to a 20 percent stake in itself to Mitsubishi UFJ Financial Group, Japan’s largest commercial bank, for about $8 billion. Mitsubishi has $1.1 trillion in bank deposits, which will help bolster Morgan’s stability of financing. Goldman Sachs is also expected to move to increase its deposit base and add more capital to its balance sheet.

The changes by Morgan Stanley and Goldman essentially bring to an end the era of the big, independent Wall Street investment bank and a return to the model that dominated before the Glass-Steagall Act of 1933 forbade commercial banks from also owning securities firms.

Both banks said they requested the change in their status. But the changes also closely follow comments from executives at both investment houses saying their business model was not broken and that transforming into deposit-funded commercial banks would not necessarily help them perform better. This raised the question of whether the change was really voluntary, which both banks insist it was, or was mandated by a Federal Reserve eager not to have to come to the rescue of another failing financial institution."

Who cares whether or not it was voluntary? It don't see how it can possibly be a bad thing that execs will no longer be able to make tens of millions of dollars every hour by betting that the price of derivative X or swap Z will rise (or fall, as the case may be). I heard someone on the radio implying that this will reduce incentives to innovate. Rubbish. "Innovation" usually means, or should mean, useful innovation.

P.s. According to the UN Human Development Report (2007-08), the Gini coefficient for income inequality in the U.S. is .408 (where zero is complete equality and one is the most possible inequality). Mexico is at .461, Mali at .401. The degree of U.S. income inequality is now more typical of what used to be called Third World countries than of other rich countries.