Goldman, Morgan woes could trigger more FII exit

23 Sep, 2008, 0345 hrs IST,Pradeep Pandey, ET Bureau
MUMBAI: With the US Federal Reserve approving the conversion of two major global investment firms into bank holding companies, Indian market is likely to witness more pullouts by foreign institutional investors (FIIs), fear BSE traders. The conversion of Goldman Sachs and Morgan Stanley into banks may see more winding down of structured investments vehicles which these entities had built in India and other Asian countries. Now, there could be a curb on their investment portfolios with much tighter regulatory norms, traders said.
Goldman Sachs and Morgan Stanley will now be regulated like any other bank and will have to follow strict ‘dos and don’ts’ of the regulation. P-Notes, exotic structured investments and other such derivatives-based instruments would have to be wound down, a senior official with a leading private securities firm said.

“As such, investments would be required to be shifted to some other subsidiaries of the proposed banks. However, on the positive side, they would be able to access public deposits,” he said. Airing a similar view, a financial market specialist with a global financial institution told ET that these entities would now be placed under much tighter regulation by the Fed, including tough capital requirements for investments. In addition, they will have to follow sectoral and group limits under overall banking norms as they will be controlled by the banking regulator, he asserted.

In the backdrop of the global turmoil of the past two weeks, FIIs have been pulling out drastically from the Indian market and have been on a continuous selling mode. In this calendar year so far, FIIs have sold a net of about $ 8.2 billion (Rs 37,000 crore) and have been net sellers for every month since May, according Sebi data.

“It is for the first time since 1994, that FIIs are net sellers for such a long sustained period,” said a technical analyst. Goldman Sachs and Morgan Stanley were granted approval on Sunday to become bank holding companies regulated by the US Federal Reserve.

Under the new set-up, the Federal Reserve becomes the primary regulator of the parent companies though the Securities Exchange Commission (SEC) continues to regulate their US securities businesses. The Federal Reserve’s control over banks is much tighter though Goldman and Morgan would gain long-term access to the Fed’s discount window and be able to access bank deposits insured by the Federal Deposit Insurance Corp.

via:E.T