Morgan Stanley's E*Trade Deal to Test Washington's Regulatory Mood in Election Year Feb. 20, 2020, at 2:53 p.m. BY MICHELLE PRICE WASHINGTON (Reuters) - 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 that will see Democrats continue to shine a spotlight on Wall Street excesses, said analysts.

The bank's CEO James Gorman said on Thursday he expected the $13 billion all stock deal, the largest by a Wall Street giant since the 2007-2009 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 President Donald Trump's regulators has helped unleash other bumper deals in the financial sector.

In November, Charles Schwab Corp said it was buying rival TD Ameritrade, in a $26 billion blockbuster deal. That announcement came just days after federal bank regulators approved the $28 billion merger of BB&T Corp and SunTrust into a new firm called Truist Financial Corp in just nine months.

But such a bold move by Morgan Stanley, one of the riskiest banks in the United States with roughly $900 billion in assets, will 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 Federal Reserve, and potentially other financial watchdogs. Progressive Democrats say mega-banks 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," said Jaret Seiberg of Cowen Washington Research Group 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 Congress. The election also poses a risk to the deal, he added, although terms for some key Fed officials do not expire until 2021.

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 $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 2019, its data shows.

The value of M&A among commercial, savings and investment banks reached $54.66 billion by November, the highest since 2009, according to data from Dealogic.

While 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 United States by some key measures, including shortterm wholesale funding needs and leverage, according to U.S. Treasury's Office of Financial Research.

E*Trade also ranks in the top 20 financial firms in the United States measured by leverage, according to the Treasury's research. That will likely spark calls from Democrats such as progressive firebrand and presidential candidate Senator Elizabeth Warren for the Fed to block the deal, said analysts.

"Any giant Wall Street bank buying a household name company is a tempting talking point for progressive Dem(ocrats)," said Capital Alpha Partners in a note on Thursday, adding though that the Fed is unlikely to bow to that pressure. "They will listen to but probably won't be swayed by arguments against the deal."

Price, M. (2020). Morgan stanley's e*trade deal to test washington's regulatory mood in election year. US News & World Report. February 20,2020.

1. What is the strategic rationale for the transaction?

2. Why did E*Trade become more open to a transaction recently given unsuccessful approaches in the past?

3. What are the key transaction terms?

4. How do you think Morgan Stanley shareholders will react to the deal and why (i.e., what are the pros and cons)?

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