The last two major investment banks in the US have changed their status to become bank holding companies, allowing them to take deposits from investors.

The changes should enable Goldman Sachs and Morgan Stanley to raise more funds by opening commercial banks.

The move – part of a huge restructuring effort on Wall Street – will also give them access to Federal Reserve support.

The US government has announced a $700bn (£382bn) package to tackle the worst financial crisis for decades.

CHANGING WALL STREET
– May 2008: JP Morgan Chase buys Bear Stearns for $2.2bn, ending its 85 years as an independent firm
– September 2008: Lehman Brothers files for bankruptcy, the largest in US history, ending its 158-year history
– September 2008: Bank of America acquires Merrill Lynch, founded in 1918, in a $50bn deal
– September 2008: Goldman Sachs and Morgan Stanley request to change their status
Congress is considering the plan, drawn up by Treasury Secretary Henry Paulson, which would set up a fund to buy up much of the bad debt held by financial institutions, which had triggered the credit crisis.

The BBC’s business editor Robert Peston said transforming these investment giants into licensed, deposit-taking banks marked the end of an era for Wall Street.

“Now that the US taxpayer is in a formal sense underwriting Goldman and Morgan Stanley, their days of buckling the swash on the worldwide high seas of finance are over, possibly for good.”

‘Greater safety’

There had been fears, given the recent turbulence in the financial markets, that Morgan Stanley and Goldman Sachs would not be able to survive as independent players, and both their share prices have come under pressure.

HAVE YOUR SAY They speak about ‘economic forces’ as if they are natural disasters – they are man made
James, Southend
Send us your commentsBoth banks had filed requests with the Federal Reserve to change their status, and late on Sunday, the Fed announced it had granted the requests.
The last few weeks have seen dramatic and unexpected changes among banks, with Merrill Lynch being bought by Bank of America and Lehman Brothers filing for bankruptcy protection.

Earlier this year, Bear Stearns was acquired by JP Morgan Chase.

Flexibility and stability

Goldman Sachs said it already had two existing deposit businesses, Goldman Sachs Bank USA and Goldman Sachs Bank Europe, into which it is transferring assets from other parts of the business.

“With over $150bn in assets, GS Bank USA will be one of the 10 largest banks in the US,” the bank said.

GOLDMAN SACHS
Founded 1869
It became a listed company in 1999 having been a private partnership
Provides investment banking, securities and investment management services
Recently reported a 70% fall in third-quarter earnings to $845m (£473m)

“We intend to grow our deposit base through acquisitions and organically,” it added.

Commenting on the change for Morgan Stanley and Goldman Sachs, Chip MacDonald, mergers partner at law firm Jones Day, said: “It creates a perception of greater safety and supervision. It really rationalises the regulatory system”.

“It should be good for both Goldman Sachs and Morgan Stanley.”

Goldman Sachs said it decided to be regulated by the Federal because it “provides its members with full prudential supervision and access to permanent liquidity and funding”.

John Mack, chairman and chief executive officer of Morgan Stanley, said: “This new bank holding structure will ensure that Morgan Stanley is in the strongest possible position – with the stability and flexibility to seize opportunities in the rapidly changing financial marketplace.”

“It also offers the marketplace certainty about the strength of our financial position and our access to funding.”

Solution sought

Mr Paulson has urged other countries to follow the American example in dealing with the international financial crisis.

MORGAN STANLEY

Founded 1935

Areas include institutional securities, wealth management and asset management

Merged with Dean Witter, Discover & Co in 1997

Recently saw third quarter earnings fall 3% to $1.43bn

Both presidential candidates have been having their say about the financial crisis.

Republican John McCain said President George W Bush should take the blame for the crisis along with both parties in Congress.

Mr McCain said he was enraged by the greed of Wall Street speculators and said the rescue plan should be funded by cutting government waste, rather than through taxation.

Meanwhile Democrat presidential candidate Barack Obama suggested Mr Paulson could be asked to play a role in his administration should he win the presidency.

But Mr Obama criticised the bail-out proposal, calling for independent supervision of its implementation.

News reported by The BBC

SINGAPORE (Reuters) – U.S. investment bank Morgan Stanley is weighing whether it should remain independent or merge with a bank, given the recent turbulence in the company’s share price, broadcaster CNBC reported on Wednesday.

Morgan Stanley officials were not in merger talks as of late Tuesday, CNBC said, citing unnamed people close to the matter.

“But senior people at Morgan concede that further zig-zags in the company’s stock price could and possibly will force the company to change course and seek a merger partner, probably a well capitalized bank,” CNBC reported on its Website.

Morgan Stanley shares closed down 10.8 percent at $28.70 on Tuesday, having fallen 46 percent so far this year.

Morgan Stanley officials in Hong Kong declined to comment on the report.

In an interview with Reuters on Tuesday, Morgan Stanley’s Chief Financial Officer Colm Kelleher said the No. 2 U.S. investment bank remains confident in its broker-dealer model and dismissed the need to merge with a deposit-taking bank, even as he maintained a cautious stance about the markets.

(Reporting by Lincoln Feast; Editing by Jean Yoon)

>News reported by Interactive Investor

Morgan Stanley and JP Morgan Chase have agreed to buy back more than $7bn of securities and pay fines to settle allegations that they misled investors.

The deals were with the New York Attorney General and other regulators.

The Wall Street banks were accused of marketing debt products, called auction-rate securities, as much safer than they were.

Other financial firms are also being investigated for misstating the risk of these investments.

Under the deal with New York Attorney General Andrew Cuomo, Morgan Stanley will buy back about $4.5bn worth of auction-rate securities at face value by 11 December.

JP Morgan Chase has agreed to redeem about $3bn of auction-rate debt it sold to customers, which include retail customers, charities and small-to-medium sized businesses by 12 November.

Its settlement also covers debt sold by Bear Stearns, which it bought earlier this year.

Neither bank admitted or denied wrongdoing.

‘Latest victories’

US authorities are investigating how auction-rate securities were marketed throughout the industry before the $330bn market collapsed in February as trouble in the credit markets due to the US sub-prime crisis spooked investors.

Last week, the New York Attorney and the Securities and Exchange Commission (SEC) reached settlements with Citigroup and Swiss banking giant UBS that required the pair to repurchase in total $26bn of the securities.

“Today’s multi-billion dollar agreements are the latest victories for investors seeking relief from the collapse of the auction rate securities market, which has left a stranglehold on billions of dollars,” said Mr Cuomo.

“The fundamental goal has been to return money into the hands of investors, and that’s what these deals do.”

Repercussions

JP Morgan Chase and Morgan Stanley will also reimburse customers who have sold their auction-rate debt at a loss.

JP Morgan Chase will pay a $25m penalty to New York State and the investor protection group the North American Securities Administrators Association, while Morgan Stanley will pay a fine of $35m.

Separately, New Hampshire securities regulators have sued UBS for misleading the state’s student-loan agency about auction-rate debt and so resulting in less money available to offer students loans.

Student-loan agencies and municipalities were frequent users of auction-rate securities because they were seen as highly liquid investments, almost equivalent to cash but offering a higher return because their rates were reset at weekly or monthly auctions.

News reported by The BBC

Morgan Stanley’s decision to take a short position in HBOS, whose £4bn rights issue it had underwritten, was cleared by City regulators yesterday.

The Financial Services Authority is satisfied that the decision to take the short position was made by the investment bank’s trading desk entirely separately from the underwriting department, which had inside information about the performance of the issue. Morgan Stanley is said to have kept the watchdog informed of its intentions throughout the process.

The investment bank surprised the market on Monday by declaring a 2.35 per cent short position in HBOS taken out on Friday, the day the rights issue closed.

HBOS’s shares had traded below the 275p rights price all morning but they jumped soon after the offer closed at 11am as short sellers started covering their positions. Better-than-expected results from Citigroup in the US added to demand for the shares as long investors sought exposure to the banking sector. The shares continued to rise, closing up 5 per cent at 282p.

Morgan Stanley’s trading desk decided to sell shares it did not own to satisfy the demand, which might have evaporated by Monday if there had been bad news on the financial sector. The bank’s trading desk also knew that Morgan Stanley was going to be on the hook for a large chunk of the £2.6bn of unsold HBOS stock.

The episode would not have come to light if the FSA had not introduced new rules forcing holders of short positions of more than 0.25 per cent in companies conducting rights issues to disclose their bets.

It was widely believed in the market that the issue had received a low take-up because HBOS shares had traded below the rights price in the crucial few days before the closing date. Barclays had revealed earlier on Friday that its offer of £4bn to existing shareholders had received a take-up of only 19 per cent.

The bank had not shorted HBOS’s shares at any time during the rights issue process, despite being allowed to do so, though it shorted other banks as proxies to hedge its exposure.

Dresdner Kleinwort, the other underwriter of HBOS’s rights issue, has not declared a short position in the bank

HBOS shares fell 1.3 per cent yesterday, in line with the sector, to close at 261p.

>News reported by The Independent

Why are we asking this now?

It has emerged that Morgan Stanley, one of two huge investment banks that has been helping HBOS to raise £4bn from shareholders, was at the same time selling the company’s shares short – betting that the Halifax Bank of Scotland group would fall in value. Morgan Stanley has not broken the law, or breached any City rules, but its dealings have certainly raised eyebrows. And this is the latest in a series of controversies in recent months relating to short selling.

What is short selling?

It is a way of profiting from a fall in a company’s share price. Most stock market investors buy shares in the hope and expectation that their value will increase – “going long” in the jargon of the City – but it is also possible to make money when the opposite happens. Shorting means selling a share that you don’t own in order to buy it back once it has fallen in price, netting a profit in the process.

How can you sell something you don’t own?

In a conventional short sale, the investor – usually a hedge fund or large investment bank – takes the view that shares in a particular company are set for a fall. The investor then borrows the shares from someone who does own them – most often a large pension fund or insurance company – and sells them in the market. Once the shares have fallen in value, the investor buys them back at the lower price and returns them to the lender.

If all goes according to plan, the investor is paying less to buy back the shares than it received for selling them. There are some costs involved, notably that the lender charges a fee for loaning out its shares, but in an ideal world the shorter still makes a tidy profit.

There’s a variation on this theme, known as “naked short selling” – a form of shorting where the investor doesn’t even bother to borrow the shares it is betting against. This is possible because share deals are often not settled immediately. The seller promises to deliver the stock after a short delay – say three days. If a short seller buys the stock back before it has to make good on the original delivery, no shares need actually change hands.

So what’s all the controversy?

The biggest concern is that short selling has often been associated with market abuse. The clearest victim of such abuse was HBOS itself, earlier this year. Over the course of just an hour one day in March, its shares plunged when rumours swept the stock market that the bank had financial problems similar to those that caused the collapse of Northern Rock. The rumours were totally false and the share price recovered later in the day, but not before investors with short positions in HBOS shares had made a handsome gain. City regulators are still trying to discover who started the malicious gossip about HBOS, but there is widespread suspicion that the rumours were planted by a hedge fund keen to make a fast buck. Such behaviour is illegal, but also very difficult to investigate.

What about Morgan Stanley?

The ethics of Morgan Stanley’s shorting of HBOS is much less clear-cut. The investment bank knew that if HBOS’s fund-raising was not a success, it would be held to a promise to buy the bank’s shares at a higher price than their prevailing market value, booking a nasty loss. Selling the shares short was one way of making some of these losses back.

Morgan Stanley argues that its shorting of HBOS was sensible risk management, conducted by a separate department to the part of the bank handling the fund-raising. But HBOS must wonder why a bank to which it is paying considerable sums for work on its fund-raising has been simultaneously making money from a fall in its value. It’s also clear that by Friday, when Morgan Stanley began shorting HBOS shares in a major way, it knew that the fund-raising was going to be a serious flop.

Any other problems with this practice?

Critics also have little time for pension funds and insurance companies that facilitate the process by lending out their shares. These large investors buy shares on behalf of their clients – you and me – and presumably hope they will rise in value. So it seems bizarre that they’re prepared to lend stock to people who want to make money from falling share prices.

The pension funds’ argument is that they buy shares with a long-term view. The sort of short-term ups and downs caused by short sellers does not affect this, and besides, they say, they make money for clients from stock lending. Still, in the worst cases, short selling can totally destabilise a company, damaging its prospects for years to come.

What sort of money is involved?

The hedge funds and investment banks that dabble in short selling do so with astronomical amounts of money. Analysis conducted by The Independent shows that hedge funds have made more than £1bn betting on a fall in HBOS’s share price in the past two and a half months. One single hedge fund is thought to have made £1bn betting on the collapse of Northern Rock last year.

Remember that stock-market investment is a zero-sum game. For every pound of profit made by a short seller, there’s an equal loss for shareholders who have gone long.

So what can be done?

Regulators around the world have already attempted to police short selling more closely. The Securities and Exchange Commission in the US, for example, has prosecuted traders for spreading false rumours about companies they’ve sold short. The Financial Services Authority in the UK still hopes to bring similar charges against the HBOS raiders.

New rules have also been introduced. Naked short selling is illegal in the US in most circumstances. In the UK, the FSA announced earlier this year that anyone shorting the shares of a company holding a rights issue to raise new funds would have to disclose their trading positions once they exceeded quite low thresholds. It has promised additional regulation if these rules do not prove sufficient to prevent market abuse.

Pressure has also been brought to bear on stock lenders. Many pension funds now operate on the basis that they will not loan out any of their shares. But the fact remains that short selling, when done within in the law, is a legitimate investment practice and an outright ban would be a draconian intervention. Buying shares in a company is, in essence, a simple gamble that the price of the stock will rise. Why should investors not also be allowed to bet on a fall in share prices?

Is short selling just another example of City excess?

Yes…

* Making money as companies lose their value is simply profiting from other people’s misery

* Short selling is very often associated with murky – and even illegal – market practices

* Hedge funds, often owned by a small group of traders, make massive profits from driving down share prices

No…

* Betting on a share-price fall is no less legitimate an investment than gambling that the market will rise

* City regulators already police the financial markets to curb illegal practices and catch those who flout the rules

* Some instances of short selling are just a way of reducing the risk of very large “long” investments

News reported by The Independent

Investors in UK bank HBOS have overwhelmingly declined the chance to buy new shares in the firm.

The top mortgage lender announced that just 8.29% of the new shares offered in its £4bn rights issue were taken up.

HBOS shares were available on the stock market for less than the 275 pence issue price last week, making it unattractive to shareholders.

But HBOS will still get the £4bn it wanted, as the unsold new shares will be bought by the issue’s underwriters.

The underwriters Morgan Stanley and Dresdner succeeded in placing almost 30% more of the new stock on Monday at 275 pence per share after putting the so-called “rump” of unsold shares on the market.

They have two days to find buyers willing to pay at least 275p a share before they have to buy the shares.

The underwriters currently hold 62% of the shares created by the rights issue.

“The deal will probably enter the City lexicon as the phrase “doing an HBOS”, to mean how not to raise money.” Robert Peston, BBC Business editor

HBOS shares fell more than 6% on Monday to 264.5 pence on concerns about the number of willing buyers for the lender’s shares at that price.

“The market knows that the underwriters would want to sell their stock at the earliest opportunity, which would keep HBOS’s shares under downward pressure at a time when the weak housing market is doing quite enough to depress its shares,” the BBC’s business editor Robert Peston said.

“The deal will probably enter the City lexicon as the phrase ‘doing an HBOS’, to mean how not to raise money – though that would be unfair, because HBOS is the victim of a rights-issue system that is cumbersome and slow,” he added.

When HBOS launched its rights issue in April, its shares cost about 500p.

Shareholders were offered two new shares at the then heavily-discounted price of 275p for every five shares they already owned.

‘Fierce financial storm’

Since then, housing market concerns and fears about further write-downs in the banking sector have weighed heavily on shares.

“We saw unprecedented volatility in bank stocks” HBOS spokesman

“The rights issue was conducted in the middle of a fierce financial storm,” an HBOS spokesman said.

“We saw unprecedented volatility in bank stocks.”

But the bank stressed that it had still managed to raise £4bn.

Explaining the poor shareholder take-up, analysts said many investors were wary of buying HBOS shares given the current uncertain outlook for the housing market.

“It is investors taking a view on the UK property market, which is a decision for the steeliest investors given where we are,” said Richard Hunter, from Hargreaves Lansdown.

HBOS is one of a host of leading British banks to tap their shareholders for extra cash to strengthen their balance sheets as the fallout from the credit crunch continues.

The Royal Bank of Scotland has raised £12bn while Barclays has secured £4.5bn in new funding from a range of foreign investors.

Barclays announced last week that 19% of its new shares had been taken up by existing investors.

News reported by The BBC

Halifax Bank of Scotland (HBOS), the UK’s top mortgage lender, will reveal on Monday how many investors have opted to buy new shares in the business.

Media reports have suggested that shareholder support for the bank’s £4bn rights issue will be lukewarm amid concerns about its falling share price.

HBOS shares have been trading below the 275 pence per share offer price, making it unattractive for many investors.

But HBOS will still get the money as the issue is underwritten by top banks.

Share slump

This means that the underwriters – Morgan Stanley and Dresdner Bank – will end up owning a large chunk of the new shares until they can sell them on to other City institutions.

HBOS is one of the host of leading British banks to tap their shareholders for extra cash to strengthen their balance sheets as the fallout from the credit crunch continues.

The Royal Bank of Scotland has raised £12bn while Barclays has secured £4.5bn in new funding from a range of foreign investors.

But the HBOS cash call has come under particular focus because of the sharp fall in its share price in recent months.

When the bank launched its rights issue in April, HBOS shares were worth about 500p.

But its shares have fallen by more than 40% in recent weeks, making it cheaper for investors to buy existing shares in the market rather than take-up the new ones on offer.

HBOS shares rallied on Friday, closing up 5% at 282p, but could come under fresh pressure when the outcome of the rights issue is known.

The Sunday Times reported that as few as 10% of HBOS investors had subscribed for new shares by the time the offer officially closed on Friday morning.

It said most of the bank’s two million small investors had sidestepped the offer.

The gloomy outlook for the UK housing market and the economy in general has eroded investor confidence in leading banks.

But it has been claimed that HBOS has been particularly hit by the practice of “short-selling” where investors sell shares, thus forcing them down, only to buy them later for a big profit.

News reported by The BBC

Supporters of HBOS’s £4bn rights issue were hoping last night that yesterday’s surge in banking stocks could boost last-minute demand for the bank’s capital raising.

Shares of Britain’s biggest mortgage-lender rose 5.4 per cent to 268.25p but were still adrift of the 275p offer price for the rights, meaning that investors should be able to buy the stock cheaper in the market. Shareholders have until 11am today to take up their rights to the new shares.

But with the shares trading closer to the rights price, big investors that need to buy large chunks of HBOS stock to maintain their holdings might choose to buy the shares.

Observers said the closing of the gap with the offer price could give long-term investors who want to support the capital raising enough justification for taking up the rights.

Even if there is a late surge, Morgan Stanley and Dresdner Kleinwort, the underwriters of HBOS’s cash call, will be left with large holdings of the bank’s shares.

A “substantial” proportion of the share offer, designed to boost the bank’s capital strength as the economy slows, is said to be sub-underwritten by long-term existing investors that are likely to hold on to the stock. The banks’ underwriting guarantees that HBOS will get the money.

The FTSE 350 banks index rose 6.5 per cent after strong banking results in the US helped to lift the gloom that had driven shares of UK lenders to a new 10-year low during trading on Thursday. Bradford & Bingley’s £400m rights issue was approved by shareholders yesterday, with 93 per cent of votes cast in favour of the share sale and only 3 per cent voting against. The buy-to-let lender’s shares rose 7.5 per cent to close 1p below the 55p rights price.

Barclays has shunned the rights issue route by lining up “anchor” investors led by the Qatar Investment Authority to buy £4.5bn of new shares if existing shareholders fail to purchase them at 282p.

Barclays shares surged 8.9 per cent to 290.5p but the rise was too late for yesterday’s 11am deadline for taking up the shares.

Royal Bank of Scotland raised £12bn in its rights issue, which closed early last month when the gloom about the financial sector had lifted temporarily. The bank’s shares jumped 8.9 per cent to 179.5p yesterday but were 10 per cent the 200p rights price.

The fraught progress of B&B and HBOS’s rights issues will deter banks from using that route to raise capital in the near future. A number of bank analysts believe that UK lenders may need to raise fresh funds as the economic slowdown boosts bad debts.

UBS analysts said yesterday that Lloyds TSB, which has not joined the search for new funds, could find its capital under pressure. The analysts predicted a 30 per cent cut in Lloyds’ dividend next year because the bank will want to avoid a rights issue and has little in the way of non-core assets to sell.

Lloyds’ shares shrugged off the analysts’ concerns, rising 5.8 per cent.

News reported by The Independent