Bear, gone. Lehman, gone. Merrill, gone. And now Goldman Sachs and Morgan Stanley are to be transformed into deposit-taking, Fed-governed, ATM-fee-charging old-school bank holding companies. It’s not like they’re starting out at the bottom. The Wall Street Journal reports the agreement with the Fed puts Goldman at No. 4 in terms of outright size, behind Bank of America, JPMorgan and Citigroup. 
 
After the Fed move, a mooted merger with the banking group Wachovia was no longer Morgan Stanley’s priority, a person familiar with negotiations said.  What made the investment banks mighty was the leverage that they have now been denied. Everyone seems to agree the leverage model is broken, and with recession-wary Americans unlikely to fill Goldman and Morgan coffers with deposits any time soon, watch for these new banks to look to buy up other banks and their depositors as they enjoy their second mortgage on life.
(Photo credit: IMDB)

Other deals of the day:

* Japan’s Nomura Holdings has reached a deal to buy the Asian operations of Lehman Brothers, a source said, outbidding other banks seeking to scoop up Lehman’s Asia group on the cheap.

* Czech generic drugmaker Zentiva accepted a higher takeover offer from France’s Sanofi-Aventis that values Zentiva at around 1.8 billion euros ($2.6 billion), the companies said.

* Russia’s Onexim Group will pay $500 million for 50 percent of Renaissance Capital, one of Russia’s biggest homegrown investment banks, Onexim’s chief executive Dmitry Razumov told reporters.

* Ayala Corp, the Philippines’ oldest conglomerate, said it launched a $290 million tender offer locally and in the United States to raise its stake in outsourcing firm eTelecare Global Solutions .

* British Gas owner Centrica said it was acquiring Caythorpe Gas Storage from Warwick Energy for 70 million pounds ($130 million).

* Seamico Securities, Thailand’s fifth-largest broker, said it raised its stake in KTB Securities, a subsidiary of Krung Thai Bank, to 48.81 percent from 42 percent.

In a mutual exchange of affection that would make Barney the Dinosaur proud, rivals Goldman Sachs and Morgan Stanley each issued research notes today praising each other’s business models and stability, following a week that saw shares in both stalwart investment banks swoon and some of their rivals fail.

Goldman’s note, issued this morning, got the lovefest going. It said that the decline in Morgan Stanley’s stock was “exaggerated” by those naughty short sellers. It praised Morgan Stanley as “well positioned to capitalize on future opportunities,” and said, “We believe Morgan Stanley is sound as an on-going entity, ” Not exactly poetry, but heartfelt.

Morgan Stanley reciprocated with its own note about Goldman that said, “business model fears are overdone,” and that “GS has the necessary breathing room to address these questions in a more reasoned manner.”

Both banks may have a reprieve from the stress of shotgun weddings after the U.S. government began crafting a bailout that would curbed short-selling, guaranteed money-market mututal funds and mop up toxic mortgage debt.

Still, Morgan Stanley may find its way into the arms of partners as it continues to hold talks with a number of suitors — just at a less frantic pace.

The U.S. Securities and Exchange Commission has proposed about a dozen different restrictions on short sellers in the past few days, including an outright ban for financial stocks, but it hasn’t replaced the primary restriction on short sellers that was in place for most of the century.

The “uptick rule” or “tick test” required short sellers to sell at a price above the last price paid for a stock, or at the price of the stock’s last trade if it was higher than the previous price. The rule had been in effect since 1938, but the SEC removed the rule last year, on July 6, 2007, after saying it was “obsolete.” 

The SEC studied its removal, running a pilot program on 1,000 stocks starting in May 2005 through April 2006, a year when the bull market was just getting going and the Standard & Poor’s 500 index rose about 13 percent on its way to record highs.  Now that the S&P is down more than 14 percent since the beginning of this year,  getting rid of the rule has been blamed for increased volatility, and calls for its return could get louder as the process of market re-regulation gathers pace.

“The SEC did one of the dumb things that has been done to hurt this market, doing away with the uptick rule,” said Don Hodges, president of Hodges Capital Management.  

The uptick rule was removed just as subprime mortgages started their meltdown in August last year, which would have been a great time for investors to get short. They did, and short interest has risen to record highs this year.  

So the remaining question then  is, did the uptick rule really do anything? Check out this chart of nonblock money flow for listed U.S. stocks.

It shows stocks purchased at higher prices (upticks) versus stocks purchased at lower prices (downticks)  for the last two years. That big switch in the middle toward downticks hit around July 6, 2007.

These new short selling restrictions are much more complicated, and haven’t been studied. Maybe it would have been just as easy for the SEC to bring back the uptick rule.

-By Emily Chasan and Mark McSherry

Wall Street’s cheering the Paulson Plan – a multi-billion-dollar taxpayer-funded effort to contain the credit market crisis. But a backdraft is underway in the blogosphere. Strategist-blogger Barry Ritholtz lays it out here in The Big Picture:

We now see that the grand experiment of deregulation has ended, and ended badly. The deregulation movement is now an historical footnote, just another interest group, and once in power they turned into socialists.

Comments rolling into Calculated Risk are uniformly negative, with the two presidential candidates coming in for some scorn for supporting the asset relief plan.

A temporary ban on short-selling from the SEC is drawing some arrows as well from Zac Bissonnette in BloggingStocks:

It’s clear why the SEC is now banning it: this isn’t about leveling the playing field or making the market more fair or efficient. This about the SEC using its power to manipulate the market upward.

Some close to the Street were critical of the ramifications too. “Wall Street has discovered a great business where the upside is potentially unlimited, but the downside is ultimately put on the taxpayers’ tab,” Cary Leahey, economist and managing director of Decision Economics told Reuters.

Bear, gone. Lehman, gone. Merrill, gone. And now Goldman Sachs and Morgan Stanley are to be transformed into deposit-taking, Fed-governed, ATM-fee-charging old-school bank holding companies. It’s not like they’re starting out at the bottom. The Wall Street Journal reports the agreement with the Fed puts Goldman at No. 4 in terms of outright size, behind Bank of America, JPMorgan and Citigroup. 
 
After the Fed move, a mooted merger with the banking group Wachovia was no longer Morgan Stanley’s priority, a person familiar with negotiations said.  What made the investment banks mighty was the leverage that they have now been denied. Everyone seems to agree the leverage model is broken, and with recession-wary Americans unlikely to fill Goldman and Morgan coffers with deposits any time soon, watch for these new banks to look to buy up other banks and their depositors as they enjoy their second mortgage on life.
(Photo credit: IMDB)

Other deals of the day:

* Japan’s Nomura Holdings has reached a deal to buy the Asian operations of Lehman Brothers, a source said, outbidding other banks seeking to scoop up Lehman’s Asia group on the cheap.

* Czech generic drugmaker Zentiva accepted a higher takeover offer from France’s Sanofi-Aventis that values Zentiva at around 1.8 billion euros ($2.6 billion), the companies said.

* Russia’s Onexim Group will pay $500 million for 50 percent of Renaissance Capital, one of Russia’s biggest homegrown investment banks, Onexim’s chief executive Dmitry Razumov told reporters.

* Ayala Corp, the Philippines’ oldest conglomerate, said it launched a $290 million tender offer locally and in the United States to raise its stake in outsourcing firm eTelecare Global Solutions .

* British Gas owner Centrica said it was acquiring Caythorpe Gas Storage from Warwick Energy for 70 million pounds ($130 million).

* Seamico Securities, Thailand’s fifth-largest broker, said it raised its stake in KTB Securities, a subsidiary of Krung Thai Bank, to 48.81 percent from 42 percent.

In a mutual exchange of affection that would make Barney the Dinosaur proud, rivals Goldman Sachs and Morgan Stanley each issued research notes today praising each other’s business models and stability, following a week that saw shares in both stalwart investment banks swoon and some of their rivals fail.

Goldman’s note, issued this morning, got the lovefest going. It said that the decline in Morgan Stanley’s stock was “exaggerated” by those naughty short sellers. It praised Morgan Stanley as “well positioned to capitalize on future opportunities,” and said, “We believe Morgan Stanley is sound as an on-going entity, ” Not exactly poetry, but heartfelt.

Morgan Stanley reciprocated with its own note about Goldman that said, “business model fears are overdone,” and that “GS has the necessary breathing room to address these questions in a more reasoned manner.”

Both banks may have a reprieve from the stress of shotgun weddings after the U.S. government began crafting a bailout that would curbed short-selling, guaranteed money-market mututal funds and mop up toxic mortgage debt.

Still, Morgan Stanley may find its way into the arms of partners as it continues to hold talks with a number of suitors — just at a less frantic pace.