Goldman Sachs Group Inc and Morgan Stanley are not the companies they used to be.
Both became bank holding companies on Sunday evening and both will be able to sell assets into a new $700 bln government fund for distressed debt. Early Monday, Morgan Stanley agreed to sell up to 20% of itself to Japan's Mitsubishi UFJ Financial Group Inc.
Investors are unsure about what all this means. The companies' shares have oscillated wildly in recent weeks.
So should investors buy these shares or sell them? Below are two perspectives.
COMPETITORS ARE GONE
James McGlynn, portfolio manager, Summit Investment Partners, South Lake, Texas, which manages about $6 bln:
"As long as the government won't allow a run on these banks, and they have some time to get liquid, there aren't too many players in the field left. So when they come out of it, they should be in a better competitive position than before. It's hard to determine the right valuation now, but it's really a question of, do you want to own the only two banks large enough for the government to be worried about them? They have the ear of the government in a way that Lehman didn't, or at least, they're large enough to really matter."
BUMPY ROAD
Marshall Front, chairman, Front Barnett Associates, Chicago, which manages about $600 mln:
"There are too many uncertainties for the brokers at this point. The news we've had over the last few days has been positive and negative. The brokers can gather deposits now and they can access the discount window the way banks can. That's positive. But on the negative side, there will be a severe reduction in their leverage, which reduces potential profit. There will be a great deal more regulation for them than in the past, which means that some of the strategies they pursued in the past, particularly for Goldman Sachs, may be subject to more scrutiny. Proprietary trading is going to be a much tougher business.
"Do their valuations reflect the changed landscape? Goldman is trading at about 1.25 times its book value and Morgan Stanley is trading at less than their book value last week. But how do you know what book value is now? What are assets worth now? If we could determine book value with some clarity, it might be a starting point.
"I don't see what the prospects are for these banks and it will be a bumpy road."
