Morgan Stanley and Goldman Sachs Change Banking Status

Morgan Stanley and Goldman Sachs, the nation's last two major investment banks which each own about $1 trillion in assets, were granted approval by the Fed to let them switch to bank holding status. The banks both have previously operated as industrial loan banks, meaning they did not have to adhere to the strict regulation that applies to a commercial bank. The banks' change will be official after the mandatory five-day waiting period.

The change means that both banks will be able to take customer deposits, a move that will help bolster their cash reserves. The change also gives both banks permanent access to emergency short-term loans from the Federal Reserve, commercial banks' lender of last resort. The Fed had temporarily given investment banks access to loans to help through the credit crunch.

The change also means that Morgan Stanley and Goldman Sachs will become more regulated. Becoming a holding bank means that these two financial institutions will come under direct scrutiny of the Federal Reserve, and will have to meet Federal Deposit Insurance Corp. (FDIC) standards. The Securities and Exchange Commission will continue to oversee the banks' investment operations.

The switch means another big thing for the two banks. The Bush Administration and members of Congress are currently working on a bill that will allow banks to sell off their bad debt to the U.S. government. Financial institutions are counting on this government rescue for their survival through the nation's financial crisis that has spread throughout the global economy. Conditions of the bill in the works is that the government will only take the bad mortgages off the balance sheets of regulated companies, and the change to becoming commercial banks will allow them to sell off those bad mortgage investments if necessary.

Goldman Sachs and Morgan Stanley will have to play it safer than they have in the past. More regulation means they will have to take fewer risks, use less leverage, and maintain higher cash reserves than before. This move from the last two standing investment banks changes the landscape of Wall Street forever.



Sources:
The Federal Reserve
BusinessWeek.com