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Roubini: Goldman, Morgan Need Partners

Thursday, 18 Sep 2008 11:36 AM

Economist Nouriel Roubini says Goldman Sachs and Morgan Stanley, the two remaining major U.S. investment banks, will have to find partners to survive.

"The fundamental model of broker-dealers as independent entities is flawed," Roubini, who accurately forecast the current financial crisis, told Bloomberg.

That model is flawed for three reasons, he says.

"First, fees from securitization are essentially dead. That was an important source of revenue for the firms over the last decade."

Second, because the Federal Reserve has made loans to the investment banks, they will now have to be regulated like commercial banks.

The investment banks will need "to have less leverage, more liquidity and more capital," Roubini says.

"It is questionable how much money they will make if they are more regulated."

Third, like commercial banks, the investment banks borrow money short-term and lend it long-term. So the investment banks, too, are subject to a run, he says.

Lastly, a key difference between commercial and investment banks works against the investment banks, Roubini notes.

"Banks have access to both deposit insurance and the lender of last resort support of the Fed."

However, "Broker-dealers don't have access to deposit insurance, and they have only limited access to the Fed's lender of last resort support," he says.

Bottom line: "They have to find commercial bank partners to avoid the risk of a run," Roubini says.

Experts say the bank industry's golden days are over.

"It's going to be tougher," Ken Lewis, chief executive of Bank of America, said at press briefing.

"We are going to have to be better at what we do."

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Economist Nouriel Roubini says Goldman Sachs and Morgan Stanley, the two remaining major U.S. investment banks, will have to find partners to survive."The fundamental model of broker-dealers as independent entities is flawed," Roubini, who accurately forecast the current...
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Thursday, 18 Sep 2008 11:36 AM
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