Someone once told me the day GS fails is the day US economy will be over and done. Well, I won't be surprised if GS and MS go out in the next few weeks. Wonder how much longer the US economy can avoid a depression...

 

Goldman Sachs won't go bankrupt regardless of what some people believe. The Goldman Sachs name is too valuable, Goldman Sachs alumni are too powerful, and Goldman's clients and the general public have too much respect for the firm for it to ever go bankrupt or be sold.

If Goldman were to go bankrupt the U.S. economy would be wiped out. The financial markets would stop functioning and the world would come to an abrupt end.

 
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here's a quote that I found really strange in that article:

The fate of both Morgan Stanley and Goldman Sachs will be front and center Monday morning, as the Street wakes up to a world where the independent broker-dealer are increasingly thin in number.

This tumultuous year has made it clear that investment banks like Lehman and Bear Stearns face vulnerabilities that commercial banks such as J.P. Morgan and Bank of America are less prone to. The investment banks must constantly depend on short- and medium-term money markets to fund their operations. Commercial banks, meanwhile, can count on more stable consumer deposit bases.

In a highly volatile market, some advantages accrue to banks that can rely on those more stable deposit bases.

Is that all there is holding up financial institutions? Frickin consumer deposits???? I don't analyze financial companies for a living - but can someone with knowledge weigh in here? Is this just dumb business journalism? Or has it really come to this?

 

The IBs are just too heavily levered - e.g. GS and MS levered at 8x and 12x common equity respectively. At such high leverage levels, if their level 1, 2, or 3 assets (RE, CDOs, CLOs, and other derivatives) drop in value in any given quarter they'll be forced to write down the value of these assets and this would drain SHs equity deeming these entities practically insolvent. If MS or GS have material exposure to any real estate - commercial or residential or their derivatives - they'll have to further write down asset values pushing them more and more towards insolvency and potential ratings downgrades. This is the worst case scenario facing any pure play IB and this is essentially what happened to Bear and in a sense what is happening to LEH.

The commercial banks don't face this problem because (1) they can account for these assets at cost w/o marking to market as is the case with IBs and (2) they receive a steady flow of cash from consumer and corporate deposits worldwide so they have a cushion of cash before hitting the equity paper. Plus, as a commercial bank they have access to the Fed as lender of last resort so their cost of funding (and risk) is lower due to diversification of equity sources. On the other hand, the IBs must constantly issue short term debt to refinance maturing short and long term notes, and when these funding sources dry up they basically can't refinance maturing paper and a chapter 11 is inevitable.

So stable depositor bases are pure cash in SH equity and provide a much needed cushion to absorb losses. The only risks commercial banks face is in ensuring that their net interest margins remain positive (short term rates must be lower than longer rates for banks to clear a profit on consumer loans) and that their provisions for losses and bad loan reserves are properly managed which is in turn dependent on their loan underwriting standards - stringent credit checks, credit history, collateral standards, equity cushions, and other good faith lending practices.

And ....I'm not saying that GS and MS will fail, they just have a much higher risk profile compared to the banks. Glass Steagal will be well in effect as we see more IB - CB mergers ahead. It's about perceived risk and liquidity - not brand name, or how prestigious you are. LEH, BS, ML were all solid brands, but suffered due to excessive leverage, counterparty and liquidity risk, and a basic halt in the short-term credit markets that they all live by. Same thing with the auction rate securities... but that's a whole different story. MS and GS will survive but would have to reconsider their overall business model and diversify their funding sources. One of these firms may actually buy out a commercial bank within the next 5 - 10 years if not sooner.

Hope that helps.

 

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