Goldman Sachs and Morgan Stanley were granted approval early this morning to become bank holding companies regulated by the US Federal Reserve, effectively killing off the investment banking model that has dominated Wall Street for more than 20 years. The move enables Goldman Sachs and Morgan Stanley to take deposits, gain easier access to financing and gives them more flexibility to buy retail banks. It was initiated by the only two big and independent US investment banks left after the failure of Lehman Brothers and the agreed takeover of Merrill Lynch last week.
The change, part of a wrenching transformation of the Wall Street landscape amid financial markets turmoil in the past two weeks, means that previously freewheeling firms will be subject to much tighter regulation by the Fed, including tough capital requirements. That could curb their ability to leverage up their proprietary trading and other activity with mountains of borrowed money. This will reduce their chances of producing the kind of huge profits they had been making until the credit crisis started to hit home this year.
"The timing of this move, in conjunction with all of the other unprecedented steps taken in the past week, shows the seriousness with which the government and the banks themselves are still taking the short-term risks to systemic stability in the financial markets," said Kirby Daley, senior strategist at Newedge Group in Hong Kong. "The implications of all these measures taken together are mind-boggling."
Under the new set-up, the primary regulator of the parent companies switches to the Federal Reserve from the Securities and Exchange Commission but the SEC continues to regulate their US securities businesses. In exchange for the increased scrutiny, Goldman Sachs and Morgan Stanley gain long-term access to the Fed's discount window and access to bank deposits insured by the Federal Deposit Insurance Corp. * Reuters