Goldman, Morgan Bank on Confidence Boost

Goldman Sachs' (GS Quote) and Morgan Stanley's (MS Quote) transformation into bank holding companies earlier this week is an attempt to shore up flagging public confidence in the firms, but may have little material impact on the businesses.

Registering with the Federal Reserve as bank holding companies should ease the fears that led to the free fall in the firms' shares last week and allow the firms to avoid a hasty merger with a commercial bank. But despite erasing the line between commercial and investment banks, the changes at Goldman Sachs and Morgan Stanley may not be as dramatic as they sound, industry observers say.

"This is all about perception," says Robert Litan, vice president of research and policy at the Kauffman Foundation. "That's what's driving this, is they want to give the perception they have a more stable source of funding, whether that's true or not. This is all about calming the markets down."

Goldman Sachs and Morgan Stanley, the last two remaining major, independent investment banks, on late Sunday agreed with the Fed to become bank holding companies, after coming under assault following the bankruptcy of smaller competitor Lehman Brothers' and the government takeover of American International Group (AIG Quote).

While many painted the decision to become bank holding companies as the death of the investment bank as it has existed on Wall Street since the Great Depression, both firms say becoming a bank holding company does not affect their ability to conduct existing business.

The move subjects Goldman and Morgan Stanley to closer regulation and cash requirements, in exchange for easier access to capital. Traditionally, investment banks have operated with significantly more leverage, or borrowed funds, than commercial banks. However, in response to heightened investor and regulatory concern about risk, both investment banks and commercial banks have been reducing leverage.