The Fed’s “extraordinary measure” on Sunday night of agreeing to convert investment banks Morgan Stanley and Goldman Sachs into traditional bank holding companies is an attempt to prevent the crisis on Wall Street from infecting its two premier institutions, says the WSJ. With the move, Wall Street as it has long been known – a coterie of independent brokerage firms that buy and sell securities, advise clients and stay less regulated than old-fashioned banks – will cease to exist. Goldman and MS will come under supervision of national bank regulators, subjecting them to new capital requirements, additional oversight, and far less profitability than before. But they will also be able to organise their assets, and position themselves to be acquired, to merge, or acquire smaller companies with insured deposits. In the short term, the move could significantly slow merger talks Morgan Stanley had initiated with Wachovia and also throws doubts on its move to raise fresh capital from CIC, the Chinese investment agency. The NYT notes that the firms requested the change themselves, in a “blunt acknowledgment that their model of finance and investing had become too risky and that they needed the cushion of bank deposits that had kept big commercial banks like Bank of America and JPMorgan Chase relatively safe amid the recent turmoil”.

This entry was posted by Gwen Robinson on Monday, September 22nd, 2008 at 5:42 and is filed under Capital markets. Tagged with goldman sachs, Morgan Stanle. Edit this entry.