With the last two remaining big investment banks seeking refuge with the US Federal Reserve, Wall Street changes irrevocably after two decades of huge profit-taking. It was only a matter of time before the hurricane that took a toll on the other members of the Big Five— Bear Stearns earlier in the year and Merrill Lynch and Lehman Brothers last week— struck the other two, Morgan Stanley and Goldman Sachs, despite their relatively better balance sheets and less “toxic mortgages”. The US Treasury Secretary, Mr Henry Paulson, offered a $700-billion bailout plan for the distressed financial markets and the offer of becoming commercial banks to the two remaining giants of Wall Street after Lehman Brothers had collapsed, finding no rescuers, and Merrill Lynch had been bought by Bank of America. Both of them will now be subject to tighter regulatory control. They will be able to access US Fed funds that their less fortunate rivals, Bear Stearns and Lehman could not, as independent investment banks. Suddenly, commercial banks, the less glamorous peers of the financial world, are the flavour of the season.

The involuntary mergers of the troubled investment giants into the commercial banks suggest the rise of universal banking, that combines commercial and investment banking. Despite the repeal of the Glass-Steagall Act of 1933 and the Banking Holding Company Act 1956, both of which separated commercial banking and insurance respectively from investment banking, universal banking found no takers. But at a more fundamental level, the collapse of the Big Five investment banks and the bailout plan of the US Fed and the central banks of Japan and Australia suggest a backdoor entry of government regulation of the largely freewheeling investment banking world that had flourished after 1999.

The universal banking model found favour in India around that time when private banks were allowed to compete with public sector scheduled banks for deposits and advisory services. Just how the Indian entities of the two largest and erstwhile investment banks will fare after their conversion will be clear in the days to come. While the US copes with the spectacular hubris of runaway deregulation, Indian policymakers will have to balance their existing cautionary approach with de-regulation doses that allow the far less leveraged financial entities greater elbow room for risk-taking and profits. That will be the greatest challenge thrown India’s way by the chaos on Wall Street.

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