Read any of the business journals and you'll hear a common theme - financial institutions that have large consumer deposit bases are the best prepared to weather this financial storm. Indeed, blue chip investment banking houses like Morgan Stanley and Goldman Sachs are being urged to merge with a consumer deposit bank in order to survive.
From Bloomberg:
"Analysts including David Trone at Fox-Pitt Kelton Cochran Caronia Waller have said the demise of Lehman and Merrill may force Goldman and Morgan Stanley to pursue a sale or some sort of transaction with a bank, to gain a stable funding base of deposits and the confidence of the markets. The firms hold more than $20 of assets for every $1 in capital, making them dependent on lenders."
From the Wall Street Journal:
"The perception hurting investment-bank shares is that they can no longer rely on jittery global markets to replenish the cash necessary to fund their trading and lending businesses. That has forced the companies' borrowing costs higher, which means, ultimately, it will likely become prohibitively expensive for them to fund their businesses.
Commercial banks such as Wachovia are perceived as more stable, creating strong incentive for investment banks to link up with them, as Merrill Lynch did earlier this week with Bank of America Corp."
The cheapest source of funding for these commercial banks is good old fashioned customer deposits. Over the last couple of months, interest rates have risen on savings accounts and cds even as the Fed Funds rate has remained at 2%. Expect this rise to continue as both commercial banks and investment banks look to tap into your savings to keep themselves afloat.
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