Morgan Stanley’s takeover of brokerage E*Trade Financial Corp reflects a more relaxed regulatory mood in Washington, but it is still a gamble in an election year when Democrats continue to shine a spotlight on Wall Street excesses, analysts said.
The bank’s CEO James Gorman on Thursday said that he expected the US$13 billion all stock deal, the largest by a Wall Street giant since the 2007 to 2009 financial crisis, to be completed by the fourth quarter with little regulatory pushback.
His confidence underscores a seismic shift in Washington, where a more industry-friendly tone from US President Donald Trump’s regulators has helped unleash other bumper deals in the financial sector.
In November last year, Charles Schwab Corp said that it was buying rival TD Ameritrade, in a US$26 billion blockbuster deal. That announcement came days after federal bank regulators approved the US$28 billion merger of BB&T Corp and SunTrust into a new firm called Truist Financial Corp in just nine months.
Such a bold move by Morgan Stanley, one of the riskiest banks in the US with roughly US$900 billion in assets, would test regulators’ limits during an election year in which Democratic primary candidates are burnishing their bank-bashing credentials.
The deal would have to get the green light from the US Federal Reserve, and potentially other financial watchdogs. Progressive Democrats say megabanks put the financial system and consumers at risk, and have called for big lenders to be broken up.
“This is not going to be an easy deal to move through the Federal Reserve. Morgan Stanley is a globally significant financial institution, which means any sizable deal is subject to strict review,” Cowen Washington Research Group’s Jaret Seiberg wrote in a note on Thursday.
Casting doubt on Gorman’s timeline, Seiberg said the approval process could spill beyond the November election, during which time the CEOs of both companies would likely have to justify the deal before the US Congress.
The election also poses a risk to the deal, he added, although terms for some key Fed officials do not expire until next year.
The Federal Reserve declined to comment on the deal.
Banking deals languished after the financial crisis due to strict capital and liquidity rules imposed on lenders with more than US$50 billion in assets, making it unattractive for mid-size lenders to acquire more assets. Regulators also aggressively enforced rules that allow them to bar firms with compliance issues from expanding.
That freeze has thawed in recent years partly because Congress eased some post-crisis constraints in 2018, and partly because Trump-appointed Fed officials have sped up approvals and been more flexible on compliance hurdles.
The central bank’s approval period fell from an average of 297 days in 2015 to 135 during the first half of last year, its data showed.
The value of mergers and acquisitions among commercial, savings and investment banks reached US$54.66 billion by November last year, the highest since 2009, data from Dealogic showed.
Although that bodes well for Morgan Stanley, the Wall Street giant’s size, complexity and push into retail banking poses heightened regulatory and political risk for the deal.
Morgan Stanley is among the top five riskiest banks in the US by some key measures, including short-term wholesale funding needs and leverage, data from the US Treasury’s Office of Financial Research showed.
E*Trade also ranks in the top 20 financial firms in the US measured by leverage, the Treasury’s research showed.
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