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.
|Bank of America
|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%!
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?