The end of wall street

The day after the Federal Reserve permitted both Goldman Sachs (NYSE: GS - News) and Morgan Stanley (NYSE: MS - News) to become bank holding companies, in September 2008, The Wall Street Journal editorialized that the end of Wall Street had arrived. "[I]n a single week, the era of the independent investment bank has ended," the paper's editorial writers observed, along with many others. "Wall Street as we've known it for decades has ceased to exist."

Superficial change
While in a literal sense, the Journal was correct -- the investment banks that relied most heavily on the short-term financing of their long-term assets were indeed defunct -- the question remains just how much has really changed on Wall Street, and how different is the world of finance than it was before the momentous events of 2008? The surprising answer -- given all the hyperbolic editorializing at the time -- is that very little has changed on Wall Street in the aftermath of one of the worst financial debacles since the laws that separated commercial banking from investment banking were first implemented during the Great Depression.

True, Goldman Sachs and Morgan Stanley have fewer competitors for their services than ever before, as Bear Stearns has all but disappeared (after being bought by JPMorgan Chase (NYSE: JPM - News)); and Lehman Brothers and Merrill Lynch are much altered after being absorbed by Barclays and Bank of America (NYSE: BAC - News), respectively. That is a serious change, in their favor. What were once the Big Five Wall Street firms has been reduced to two, although to be sure plenty of competition for them still exists from the so-called universal banks such as JPMorgan Chase, Citigroup (NYSE: C - News), Bank of America, Credit Suisse (NYSE: CS - News) and Deutsche Bank (NYSE: DB - News).

Subsidizing the Street
The other major change -- again in their favor -- is that as bank holding companies, both Goldman and Morgan Stanley now have easy access -- on a regular basis, free of negative connotations -- to cheap, short-term funding from the Federal Reserve. After Bear Stearns failed in March 2008, the Fed for the first time opened its discount window to investment banks. But Wall Street firms that availed themselves of such borrowing worried that a stigma would attach to them, and seemed to avoid doing it. Now, they can borrow billions of dollars from the Fed at will at around 75 basis points and then turn around and lend that money right back to the U.S. Treasury (by buying Treasury bills or bonds) and pocket spreads of 200 basis points and up. In effect, American taxpayers are now subsidizing the profits of Wall Street.

So, yes, as these two examples illustrate, one could say there have been dramatic changes in the way -- what used to be -- Wall Street operates.

Yet little has really changed
But, in a larger sense, very little, if anything, has changed on Wall Street in the aftermath of the crisis. For absurdly high fees, Wall Street still provides M&A advice on deals. Wall Street still underwrites debt and equity securities for its corporate clients. Wall Street still provides brokerage services for institutional and retail clients. Wall Street still provides prime brokerage services for hedge funds, although because of the much-diminished competition, those that do -- among Goldman, Credit Suisse, JPMorgan -- can charge higher and higher fees and demand more and more margin. For all the talk of reregulation and the implementation of the so-called Volcker Rule, Wall Street can still engage in proprietary trading and make private equity investments. One thing that Wall Street no longer does is to underwrite and to sell mortgage-backed securities, although in time even that will likely resume.

The Journal also predicted that, under the Fed's oversight, neither Goldman nor Morgan Stanley would be able to use nearly as much "leverage" in their business as they had previously, which is undoubtedly true. "That in turn means less risk and almost certainly less profit and lower compensation," the paper conjectured. That's the part that has yet to come to pass. In 2009, Goldman had record profitability -- of $13.4 billion -- driven, in part, by the twin benefits -- of the lower cost of capital and fewer competitors -- the crisis sent its way. And, of course, Wall Street still pays its employees at absurdly high levels, compared to what they could possibly make doing anything else in the real world.

The sad truth
To see the genuine changes that the financial crisis has wrought, one must look beyond Wall Street, to Main Street. With a chronic 10% unemployment rate -- and as high as 18% if those who have just given up looking altogether are accounted for (as well as jobs in certain industries that are gone forever and homes that are no longer worth the amount of the mortgage on them), the burden of the financial crisis is without question being disproportionately borne by the American people; and that is without even trying to account for the huge budget deficits brought on, in part, by the Wall Street bailouts. These deficits will no doubt linger for our children and grandchildren to sop up.

The sad truth of the denouement of the financial crisis at the moment is that Wall Street is much the same as it was before; it's Main Street that may never be the same again.