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

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 A law enacted in 1999 repealed the earlier regulation, though Goldman and Morgan remained independent investment banks.

Morgan Stanley had sought other ways to bolster its capital, and had been in advanced talks with China’s sovereign wealth fund and others about raising as much as $30 billion, people briefed on the matter said Sunday night.

“While accelerated by market sentiment, our decision to be regulated by the Federal Reserve is based on the recognition that such regulation provides its members with full prudential supervision and access to permanent liquidity and funding,” Lloyd C. Blankfein, Goldman Sachs’s chairman and chief executive, said in a statement Sunday night. “We believe that Goldman Sachs, under Federal Reserve supervision, will be regarded as an even more secure institution with an exceptionally clean balance sheet and a greater diversity of funding sources.”

John J. Mack, Morgan Stanley’s chairman and chief executive, issued a statement that said: “This new bank holding structure will ensure that Morgan Stanley is in the strongest possible position – with the stability and flexibility to seize opportunities in the rapidly changing financial marketplace. It also offers the marketplace certainty about the strength of our financial position and our access to funding.”

By becoming bank holding companies, Goldman Sachs and Morgan Stanley gained some breathing room in the immediate term. But the change also may lay the groundwork for additional deal making. Given the number of bank failures expected this year, it is possible that Goldman and Morgan Stanley could seek to buy those banks cheaply in a “roll-up” strategy.

Before the move to make the two investment banks into holding banks, federal regulations prohibited them from pursuing such deals. Indeed, Morgan Stanley’s recent talks with Wachovia revolved around Wachovia buying Morgan Stanley.

Being a bank holding company would also give the two banks access to the discount window of the Federal Reserve. While they have had access to Fed lending facilities in recent months, regulators had planned to take away discount window access in January.

The regulation by the Federal Reserve also brings a host of accounting rule changes that should benefit the two banks in the current environment.

In return, they will submit themselves to greater regulation, including limits on the amount of debt they can take on. When it collapsed, Lehman had about a 30:1 debt-to-equity ratio, meaning it had borrowed $30 for every dollar in capital it held. Morgan Stanley currently has a debt-to-equity ratio of 30:1, while Goldman Sachs has one of about 22:1.

Bank of America, on the other hand, currently has about an 11:1 leverage ratio, while JPMorgan has about 13:1 and Citigroup about 15:1. Because they can borrow less, bank holding companies typically have lower earnings multiples.

In its statement, Goldman said that it would become the nation’s fourth-largest bank holding company, with its small existing deposit-taking units to be rolled into GS Bank USA. Morgan Stanley will convert its Utah industrial bank into a deposit-taking national bank, to be called Morgan Stanley Bank.

–Michael J. de la Merced, Vikas Bajaj and Andrew Ross Sorkin

Go to Federal Reserve Press Release »
Go to Goldman Sachs Press Release via Business Wire »
Go to Morgan Stanley Press Release via Business Wire »

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This is really HUGE news… Completely changes the dynamics of the last 2 remaining investment banks… Wall St will NEVER be the same… Maybe that is a good thing!

I am so young I don’t know what this means! Give me some popcorn John McCain!!

Let’s just hope that the Democrats don’t kill this turnaround by playing electoral politics with the terms. It will be important to see how the market reacts to Pelosi’s and Obama’s negative responses to the Paulson plan.

I am sure the two xcompanies agreed to this out of the goodness of their collective hearts.

This should have been done months ago with the other investment banks. Maybe if this was done, then we would not be in the crises we are in now. Let’s hope this is not “to little, to late”. However, only time will tell if the Fed bailout plan, and this action, will prevent our financial system from going over the edge. It is going to be tense for a long period of time.

Goldman submits to scrutiy! Talk about too little; too late. Huge paychecks now to be paid by American taxpayers – Imagine someone earning $!0-$20 an hour being asked to help finance $100 million bonuses!

Privatized profit; Socialized loss – a worst-case scenario for this country. And all of the congressmen rushing to prevent the emergency! Where were all of you when this was becoming an emergency? Enjoying the party, of course.

As always these troubled banking corporations will agree to more stringent regulations. In due course and within a political cycle or two, they will be allowed to self destruct once again and have the taxpayers and consumers pick up the tab. Freedom from consequences … that has become the American way.

CORRUPT SOLIALISM

So much for a free market economy. Will the Fed let me borrow at the discount window? I would like to unload all of the slow pay, no pay accounts on my books as well. Do you think the Fed and Paulson will accomodate me?

..rule changes…limit leverage… that sounds responsible. Good riddance to the investment bank – now will the mentality go with the change in business model? Tha might be a harder shift. I’ll believe it when I see it.

This is unbelievable. Wall Street GONE TO HELL!!!

From what I know the main issue was with the loan originators. I worked in a office in the early 1990’s and we waked documents. I know people who worked at country wide. It was standard pratice. If you given bad product without knowing….

this smells bad…and the leverage restriction will mean little because of the access to the discount window.

What does this even mean in plain English? If I were another financial institution who didn’t get this deal, I would be very nervous. As I taxpayer, I can’t help but wonder if two more Robber Barons just stole away into the night.

Things keep getting better and better for Goldman, don’t they? Nice to have powerful friends. Any coincidence the government snapped into action the day after GS fell as much as $30 in one day?

As expected, cronyism has begun to emerge.

Regulation? They’ll find ways to circumvent them.

This outrageous “rescue” is merely a vehicle for the rich to get richer.

I passed by a larger than life statue of Karl Marx while visiting East Berlin yesterday. Now I know why he had a smile on his face.

I commend Sec Paulson for his bold scenario. Whether it will work or not remains to be seen. His thinking is positive, his goal admirable and certainly within the conceptual framework for true entrepreneurs. He has taken action, laid out a program while the political leaders waffle and seek their hidden agendas. We must move and his is the best solution. Congress should support his initiative.

Wow!

11.7 leverage is still a “drink the Kool-aide” temptation.

Why is no question being raised when Paulson’s own company is one of the only survivors of this crisis?

About time these pirates were hauled in to toe the line.Arrgh, avast.

…all those tough, last bastion of capitalism wall street types—you are now a paid government employee collecting dust……..welcome you fleet, footed, geniuses to thw world of mediocrity………

It does not get any worse than this……even financial depression!

De-leveraging by semantic definitions……and ‘changes in accounting rules’?……Kaptain Komrades at the FED and TREASURY.

I would hope at least Goldman Sachs and Morgan Stanley’s shareholders would be re-set to ZERO equity. Why should Amerika bail out shareholders whose profit over the years was derived through a mechanism of leverage and MASSIVE imprudent risk taking?

SEPTEMBER 18, 2008- “CAPITALISM IS DEAD”

Well…now WE own an Insurance Company……can I get a break on my premiums that have been increased to finance all this LEVERAGE?

….gee, I hope at least I will get FREE ATM charges out of this “deal”!!!!!

I KNOW I WILL BE PAYING FOR IT IN FIVE YEARS WITH the transfer of ASSET INFLATION into MONETARY INFLATION!

Sorry day in American History…..and the History books will not treat the names of Bush, Greenspan, Paulson and Bernanke well.

“Capitalism will destroy itself from the inside” Marx!

Thank you, KOMRADE KAPITALISTS

I may be mistaken but I thought Henry Paulson had a vested interest in Goldman Sachs.

Great, Maybe next week Goldman and Morgan can be classified as a library. or a ballarina. or a tomatoe. What ever rules and oversight dictate. Please take my tax money.