Goldman and Morgan Stanley are now banks

The Federal Reserve is pulling out all the stops to stop the spread of the financial meltdown contagion that claimed Lehman Brothers, Merrill Lynch and AIG. The latest move is to allow both Goldman Sachs and Morgan Stanley to become bank holding companies. By allowing the securities firms to re-designate as banks, the Fed is giving them both access to liquidity and increasing oversight on the two firms.

While some commentators have already condemned these actions as part and parcel of what led to the crisis in the first place, I will hold off on passing judgment for now. The Fed is obviously looking to bolster these two firms with liquidity without having to put taxpayer money at risk in a bailout as we saw with AIG and will see with the Paulson bailout plan. That is an admirable goal, which I applaud.

While I still remain skeptical, let’s see how events unfold before we start condemning this latest move.

Goldman Sachs and Morgan Stanley, the last two independent investment banks, will become bank holding companies, the Federal Reserve said Sunday night, a move that will fundamentally alter the landscape of Wall Street.

The move alters one of the models of modern Wall Street, the independent investment bank, soon after the federal government unveiled the biggest market intervention since the New Deal. It heralds new regulations and supervision of previously lightly regulated investment banks, as well as an end to the outsize paychecks that helped shape the image of the chest-thumping Wall Street banker.

It is also the latest signal by the Federal Reserve that it will not let Goldman or Morgan fail. The move comes after the bankruptcy of Lehman Brothers and the near collapses of Bear Stearns and Merrill Lynch.

Now, Goldman and Morgan Stanley, which have been the subjects of merger speculation in recent weeks, can become direct competitors to larger firms like Citigroup, JPMorgan Chase and Bank of America. Those firms combine investment-banking operations with the larger capital cushions that come with retail deposits, giving them a stability that pure investment banks lack.

JPMorgan acquired Bear Stearns this spring in a fire sale brokered by the federal government, while Bank of America has agreed to buy Merrill Lynch for $50 billion. Barclays of Britain agreed to buy the core capital-markets business of Lehman Brothers out of bankruptcy late last week.

Announced without fanfare on Sunday night, the move signals the demise of the Glass-Steagall Act, the epochal legislation of 1933 that split investment banks and retail banks. A law enacted in 1999 repealed the earlier regulation, though Goldman and Morgan remained independent investment banks.

As Goldman and Morgan Shift, a Wall St. Era Ends – DealBook

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