Sector #3:

Investment Banks

The biggest change with this crisis is the end of free-flowing capital through Wall Street. Gone are the Wild West days of huge leverage and capital innovation. In their place come regulation and bank holding companies.

Both Goldman Sachs (GS) and Morgan Stanley (MS) changed their charters to become bank holding companies. The attraction of being a bank instead of an investment bank is obvious. Instead of borrowing huge amounts of money to operate, these companies will be able to utilize bank deposits. It's a cheaper form of capital with less risk, but with less risk comes lower profits. In addition, obtaining bank deposits will be a process that ultimately dilutes current share. That has already happened with GS and MS as they are both raising capital that can be used to obtain deposits.

It is a wise long-term strategy, but will current shareholders benefit? The answer is no.

Net Stock Impact: Bearish

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