Goldman, Morgan Stanley Become Bank Holding Companies

Updated from Sunday, Sept. 21

The Federal Reserve Sunday announced that Goldman Sachs(GS Quote) and Morgan Stanley(MS Quote) would transform themselves from investment banks into traditional bank holding companies.

The Fed's announcement comes after a stunning week in which a financial cataclysm changed the landscape of Wall Street, making large, independent investment banks an endangered species. The crisis forced the closing of Lehman Brothers and the sale of Merrill Lynch(MER Quote) to Bank of America(BAC Quote), and sent Morgan Stanley scrambling to find a partner.

By becoming bank holding companies, Morgan Stanley and Goldman will come under the scrutiny of national banking regulators and will be subject to new capital requirements, The Wall Street Journal noted.

Requiem for the Free Market

In order to provide increased liquidity to Goldman and Morgan Stanley while they make the transition to a new structure, the Fed said it would extend credit to the two firms' broker-dealer subsidiaries against a wide range of collateral.

In addition, the Fed will make such credit available to Merrill Lynch.

The Fed's decision allows Morgan Stanley and Goldman to set up commercial bank subsidiaries to take deposits, and gives them the same access as other commercial banks to the Fed's emergency loan program.

"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," said John Mack, Morgan's chairman and CEO. "It also offers the marketplace certainty about the strength of our financial position and our access to funding."

Goldman's new structure makes it the fourth-largest bank holding company, the company said in a press release.

Shares of Goldman ended Friday up $21.80 at $129.80, while shares of Morgan Stanley finished the session at $27.21.

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.