The Death of the Investment Bank

Updated from 8:38 a.m. EDT.

The modern, standalone investment bank died Sunday, the culmination of a stunning seven days that transformed Wall Street.

Goldman Sachs and Morgan Stanley, the last two remaining major, independent investment banks, on late Sunday agreed with the Federal Reserve to become bank holding companies that subject them to closer regulation and cash requirements, in exchange for easier access to capital.

Once vital cogs in global finance, investment banks like Goldman, Morgan Stanley -- and recently defunct firms like Bear Stearns and Lehman Brothers -- were brokers in prestige and capital. Most companies could not finance their business without them.

That isn't the case anymore. Corporate powerhouses like Microsoft (MSFT Quote) and Google (GOOG Quote) command enough capital and clout to leave investment banks struggling for relevancy.

"What are investment banks doing for the economy?" asks author and historian Ron Chernow, who wrote House of Morgan, the definitive history of J.P. Morgan banking dynasty. "In recent years investment banks have become more like corporate versions of hedge funds. Instead of being providers of capital they are managers of capital or even users of capital. When an investment bank is leveraged 35 times, it's more a debtor than a creditor. The history of Wall Street has been stood on its head in recent years."

Cramer: Goldman, Morgan Better Off

On Sunday evening, Sept. 14, four major investment banks remained following the forced sale of Bear Stearns in March. A week later, only two, Morgan Stanley (MS Quote) and Goldman Sachs (GS Quote), were left.

The events of the week -- which included Lehman Brothers' bankruptcy filing, Merrill Lynch's (MER Quote) resulting flight into the arms of Bank of America (BAC Quote) and the near collapse and eventual government takeover of giant insurer AIG (AIG Quote) -- led to a crisis of confidence in the very business model of century-old institutions like Goldman Sachs and Morgan Stanley.

Did Morgan Stanley and Goldman Sachs make the right move by becoming bank-holding companies?
	Yes No They each should have found a merger partner instead.