Everyone wants to be a bank these days! With Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) making the jump to bank holding companies (BHC) just a few months ago, a slippery slope was created where applications came from all sorts of businesses. It makes at least a little sense to me that Goldman Sachs and Morgan Stanley could switch to become banks. The additional capital that could be available from customer deposits and the access to the Fed's emergency lending facilities was needed to stay afloat in the current financial environment. Investment bank to traditional bank... not too far of a leap in my mind, but what about the latest of applications received by the Federal Reserve?

Don't Leave Home Without... Your Bank?
Recently approved in November was the application from American Express (NYSE:AXP) to become a BHC. This is a much bigger stretch to imagine a credit card company becoming a bank - but what should be interesting is how it works out. Investment banks like Goldman Sachs and Morgan Stanley, as I had mentioned before, will have to make some serious changes to the way they run their businesses. They are used running with massive amounts of leverage, but the stricter regulations that BHCs are held under will prevent this in the future. American Express, on the other hand, does not run an overly leveraged business, and maintains a capital structure similar to that of traditional banks. Having access to emergency funding and lower interest rates seems to be a big positive, while the increased regulation should be just a minor negative, as long as American Express keeps things running smoothly. Although we may not ever see branches of American Express offering checking accounts and accepting deposits - it seems that the bank status may definitely help it going forward.

Introducing the World's Least Secure Bank
One of the most interesting, and controversial, applications seen so far comes from troubled automaker General Motors (NYSE:GM). Amid talks of receiving a bailout loan to help keep it in business, GMAC Financial Services, the financing arm for the car maker, began talks to become a BHC in late October. The application has not been approved yet, as it has been having trouble gaining the required funding to meet the capital requirements necessary to be a BHC. In order to meet this requirement, GM must reduce its debt by about $30 billion through cash tender offers to debt holders. So far this deal has only been accepted by $8.3 billion worth of holders. Not nearly enough to make the cut. It seems that this last ditch effort to obtain more capital to run its businesses may fall short.

What is interesting is where these new "banks" will sit in the spectrum of already situated banks in the U.S. The following is a list of the five largest bank holding companies in the U.S. that have been around for at least five years.

Company Total Assets
JPMorgan Chase
$2.25 trillion
$2.05 trillion
Bank of America
$1.84 trillion
$760.56 billion
Wells Fargo
$622.36 billion
Data retrieved from the Federal Reserve National Information Center on December 11, 2008

Goldman Sachs, and Morgan Stanley will actually take over fourth and fifth place with assets of $1.08 trillion and $987.40 billion respectively. American Express falls down much lower on this list with $127.22 billion. It will be interesting if GMAC Financial Services meets the capital requirement to become a BHC. Even including all other parts of General Motor's businesses, the total assets of the company come in much lower than their new "competition" at just $110.42 billion. (For more, see Analyzing A Bank's Financial Statements.)

As you can see from this data, Goldman and Morgan seem to be the only ones with a fighting chance of actually becoming competitive banks in the future, truly taking advantage of all the opportunities available to BHCs - namely accepting customer deposits. It seems that the others are just looking for the cheap money from government. Who wouldn't though... I have already been running the numbers in my head to see if I, myself, could become a bank holding company. I would just love to refinance all of my debt at 1.0-1.5%!

Bottom Line
Whether these new "banks" become what we have traditionally thought a bank should be, or whether they just take advantage of the extra funding available to those that carry the name - it goes without saying that we have not seen the end of the obscure applications for the now esteemed title of bank holding company.

Will GMAC Financial Services manage to get their application through? Who do you think will be next to send in an application to the Fed? Join me (aytonmm) in the FREE Stock Picking Community, to share your thoughts and see what other investors are saying.

Read more on banks and their failures, in our article Bank Failure: Will Your Assets Be Protected?

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  6. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  7. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  10. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!