Fed now will regulate Goldman, Morgan as banking firms

Wall Street as we knew it really is history: The Federal Reserve late Sunday said it agreed to designate Goldman Sachs Group and Morgan Stanley as bank holding companies -- a move that ends the era of the giant standalone investment bank.

The change will mean the companies will be subject to much stricter federal regulation than before. It also will give them permanent access to the Fed’s borrowing window, a privilege the central bank opened to investment banks in March, but only temporarily.

In the long run, the shift means Goldman and Morgan are likely to become more like their rivals Citigroup Inc. and JPMorgan Chase & Co. Although Citi and JPMorgan, like most financial giants, have struggled under the weight of soured real estate-related investments over the last year, they have had the benefit of a large and relatively stable source of funding: consumer and business bank deposits.

Goldman and Morgan now are seeking that same stability by becoming bank holding companies under the Fed's purview. But with stability -- and tighter government oversight -- the firms most likely will sacrifice the fantastic profit potential they enjoyed as independent investment banks, including the ability to use extremely high levels of borrowed money to leverage their investment bets.

Even before the unprecedented turmoil in financial stocks this year, many on Wall Street had questioned whether the business model of the classic investment bank was sustainable. Because the firms were always heavily dependent on short-term funding from the capital markets, they were highly vulnerable to a sudden credit squeeze if investors began to fear that the businesses were in financial trouble.

That is what forced Bear Stearns Cos. into a Fed-assisted shotgun marriage with JPMorgan Chase in March, led to Lehman Bros. Holdings Inc.’s bankruptcy filing a week ago, and forced Merrill Lynch & Co. into a rushed merger with Bank of America Corp. last week.

After Lehman's abrupt demise, shares of Goldman and Morgan plummeted last week as investors feared that they, too, could be driven to ruin if nervous creditors cut off their access to short-term money. The plunge in Goldman's shares was a particularly bitter pill for a firm that has long been Wall Street's premier investment banking franchise.

Now, the two firms appear to have a much better shot at surviving on their own -- with the government's help: In its announcement on Sunday the Fed said it would provide "increased liquidity support" to Goldman and Morgan as they make the transition to bank holding companies.

For Morgan, that may put rumored takeover talks with banking firm Wachovia Corp. on ice.

The shift by Goldman and Morgan to banking-company status gives Federal Reserve Chairman Ben S. Bernanke far more power over Wall Street -- and diminishes the authority of the Securities and Exchange Commission.

In a statement on its website late Sunday, Goldman said:

We understand that the market views oversight by the Federal Reserve and the ability to source insured bank deposits as providing a greater degree of safety and soundness. We view regulation by the Federal Reserve Board as appropriate and in the best interests of protecting and growing our franchise across our diverse range of businesses.

Goldman noted that it already has two deposit-taking units -- Goldman Sachs Bank USA and Goldman Sachs Bank Europe,  which combined have more than $20 billion in deposits. The firm said it would move assets from a number of its businesses into GS Bank USA. "With over $150 billion in assets, GS Bank USA will be one of the 10 largest banks in the United States," Goldman said.

For its part, Morgan said in a statement that it "sought this new status from the Federal Reserve to provide the firm maximum flexibility and stability to pursue new business opportunities as the financial marketplace undergoes rapid and profound changes."

Morgan said it already has $36 billion in deposits in its banking businesses, and that it would seek to "build a stable base of core deposits" with its new status.

Top photo: Goldman Sachs' headquarters (Mario Tama / Getty Images); bottom photo: Morgan Stanley's headquarters (J.B. Reed / Bloomberg News)

Comments

[EdwinG]

By gosh, it is common sense that you cannot lend someone money who may not be able pay you back based on his present income. They all gambled on the increasing price of homes, therefore bankroll the existing equities. Everyone was drown by ever increasing price of home ad infinitum, therefore totally ignored the safety net of the liabilities. That's not free enterprise but financial suicide once there is no basis on loan repayment. On the other hand, many couples want to pay their high mortgages, if they are gainfully employed. Unfortunately, we are also in the environment when big corporations shipped job overseas to gain more profits. The rationale of tax cuts on corporations and high income was to propel growth in the economy, the result was a dismal failure. Iraq War is supposed to be self liquidating with oil revenues but a one way street dole of 150B/yr for Uncle Sam. With all these uncontrolled expenses and lax credit fascilitations, don't you think some people/companies violated existing laws and got away with it?

[tom]

what will this do to the stock price.

[PNW Trojan]

Would YOU be MORE concerned about $700 BILLION going to Wall Street (that's aka CLINTON) plus Connecticut where the thieves of Wall Street LIVE, with LIE-berman and Dodd? Seems ALL that $700 BILLION is going to the Freak Left (far, Far, FAR beyond Liberal) in the Washington DC, NY, Connecticult and Massachusetts - home to Kennedy and Blarney Frank. (Guess MASS didn't get enough TAX PAYER MONEY for their BIG Dig? Any of YOU interested to KNOW what Pelosi, Feinstein, Boxer, and the rest of the FREAK Left Coast GETS? I mean beyond the BILL, for BAILING OUT WALL STREET, CONNECTICUT, Massachusetts and Washington DC?? I SMELL something far beyond 'fishy.' Too bad the Justice Dept and the FBI have been neutered. You may want to THINK about your voting pattern, this November. OBAMA? You there? Oh...you DON'T want to talk about THIS, do you?????

[Alan Jacobs]

Average citizens can't understand the complexity of the Wall Street melt down and why we - the people- are being asked by George Bush to bail out fat cat millionaires. The answer is simple- the US debt and borrowing power is at stake. Here's why. All of the companies which are in trouble are also US Treasury/ Federal Reserve "PRIMARY DEALERS". These are brokers who are required by the FED to buy ALL US notes and bonds to finance the government debt. These brokers in turn sell the notes to private investors. If the primary dealers fail, the US govt cannot sell it's debt. Without debt financing Bush's government would run out of money in a short time. Since the govt runs on borrowed money, the entire US government would be forced to shut down in a matter of months. Under Clinton the govt ran surpluses- collected more than it spent. Under Bush we spend more then we collect and borrow the rest- $400 Billion this year. Thanks George !!!

[russell]

Funny...normally in the house payment equation you could figure that in five years you would be making more money, but that is not the case anymore. People are lucky to have the same job after five years. These are the same people who facilitated the outsourcing of jobs, so I am happy that it came back to bite them in the behind. Wages are declining, so people are having a hard time making the house payment. That never gets tallked about.

[Tucker]

PNW Trojan:

"Wall Street (that's aka CLINTON)"? LOL. Guess which party's in the white house at the moment? Clue: the party of fiscal responsibility.

Unlock the caps key, take your Ritalin, and be a good boy now.

[Robert Baldwin]

PNW Trojan (post #3)

Say, if you would repost completely in all caps, maybe someone would listen. You do make a rather good argument for shipping some personel overseas, though perhaps that was not your intent.

[NY / CA]

PNW Trojan - You know, you right wingers are always there to criticize the lefties in CA, NY and MA, but the truth is, these 3 states alone pay the most Federal Taxes than anywhere else in the country. One reason may be that this is where almost ALL of the business and *innovation* are occurring. Places like the Silicon Valley in SF, the entertainment industry in LA and banking in NY are all MAJOR sources of technology and products being produced to export around the globe.

So, in essence, WE *lefties* are financing all of your wars and debt and I personally am getting tired of it. Please, please tell me the last time something innovative came out of someplace like Lubbock Texas (aside from unwed teen mothers) or Nebraska or Kansas, Oklahoma, North Dakota, Wyoming?...tell me what fabulous ground breaking technologies they are coming up with to help keep this country and our economy afloat??

If all of you in those red states want to keep complaining about us *socialist liberals* in places like CA and NY - then I'd suggest you get off your behinds and start pulling your own weight in this country and contributing to our economy, because I for one am sick and tired of carrying you!

Frankly, we're being crushed under the weight of YOUR bad decision making and 8 long years of Bush & Co,'s incompetent leadership! How long do you think we can keep it up? We feel like the stool under the elephant at the circus for God's sake!

You have the highest levels of obesity because all you do is sit in front of your tv's and eat garbage food, and the Evangelicals even have a 25% HIGHER rate of divorce than the *Liberals*. How about getting out there and working on some new software, write a screenplay that's going to bring in a few hundred million from worldwide distribution, or create advanced medical technologies? C'mon people....get moving! We don't have room for your dead wood any longer.

Please keep in mind that this meltdown happened under the GOP watch. Clinton left Bush with a balanced budget and a surplus. STOP WHINING and start contributing!

[HomeTruth]

#3-PNW Trojan....Wow, your daddy should've worn one. No, make that. You Rebumblicans should all double skin and give the rest of us a chance to save this economy and great country.

DEnial is NOT a river in Egypt. Its the Rebuplican mantra of free markets, a bar-stewardised form of capitalism that sees profits privatised and losses socialised. Its pure comedy that the Republican agenda is so myopic that they have in 30years never managed to run a single administration with a balanced budget, left the American taxpayer with more debts then there is time to pay off. Defiled and recklessly defaulted on the rights of the individual with the Executive branch so obesely power hungry and an arrogance and ideology that now sees them considering putting into office a second in command who in the 21st century believes in creationism and who probably thought that Y2K was going to provide them with the second coming their visits to the Born Again Alleluia I Cant Think of Anything To Do WIth Myself So I Will Pray For Salvation Church..... And you call yourselves patriots.

Am I the only one to think the conincidence that the Savings & Loan crisis, the 1st RTC were under the tenure of George Bush Senior, and now this...RTC Mark II, is under the George Bush Squared. Its like some crazy deja-vue. They both go to war with a country long supported by predecessors from their own party, both are fiscally irresponsible and both so corrossive to the American Dream, that it reminsicent of Rome burning.

Geezzzus....does the irony that your gun toting NRA members believe in the right to bear arms based on their need to at any moments notice have the firepower and option to overthrow the government of the day ever strike you as being kind of twisted? You are the only terrorists to have successfully hit this country you claim to represent since 9/11.... you have created more harm, and now with Iraq, cost more US lives then the absolute (possibly avoidable,but lets not get into that)tragedy that was 9/11. Never before has a government been so secretive, so autocratic and so wrong in its decision making.

You are morons...and I hope to Darwinism your gene pool returns to the single celled amoeba that both occupy your soul, integrity and brain.

Wall Street gorged on cheap money, created structures that amortised cashflow streams into upfront payments, disintermediated these structures around lots of 'investors' and then repeated the process all over again. And again. Companies providing the protection, were exposed to possible defaults on assets hundred fold their capital base. Meantime the executives paid themselves salaries that would regularly represent percentage points of that companies profits. Its like listening to Larry Kudlow on CNBC when he said on Bear Stearns demise, and I paraphrase " The Sub-prime borrowers should have been able to read the small print. Now we are all paying the mistakes. They should have borrowed within their means, now the capital markets are picking up the tab." No, the incentivisation/renumeration structure meant many were missold, gearing became stratospheric...and all the time which one of the two do you think finished his high school, had 2.4 children, drove an Escalade and voted Republican?

Capitalism has been abused and soiled by a bunch of idiots who have yet to be taken to proper account. Capitalism will now have to dust itself down and a new band of individuals will have to rescue it. And guess what they will likely be from CA, MA and NY where sciences, physics and economics are not faith based options.

The markets/authorities havent even started addressing the derivatives market...another business that was thought could self-regulate itself.

PNW Trojan...you are so dumb you don't realize that most of Wall Street is Republican supporting, backside kissing mediocrity. You are so dumb, you make me smile.

[Timothy, Houston Texas]

PNW Trojan:

Ron Paul was right, but you see how the repugnicants treated him. You have these far right ideas but miss the main point- the repugnants did this. Un-controlled capitalism is just as bad as communism. The Clintons left us in GOOD shape, and bush blew it. The Clintons were nowhere near true lefties (I should know, I am a leftie but supported Ron P. and Dennis K. because I am against overseas empire and the war on drugs, but pro choice and pro regulation) but bush and co. are true righties- in the extreme sence. They are NOT republicans, they are fascist, plain and simple. They used our capitalist system to empower corporations such as Enron, Haliburton, Lockheed, ect. which is the definition of fascism.

So, if you are going to vote for McCain, do not claim to be a Republican. Just admit that your an angry fascist (saddly, you are also most likely a WASP that refuses to vote for anyone that isn't white). If you really want to be a Republican, write in Paul.

But whatever you do, please don't blame this on the semi-left we have here in America- historically they have done a far better job, from FDR to Clinton.

[James Monachino]

Bail Out Bucket Brigade

Goldman Sachs and Morgan Stanley looked in the mirror and could not see their reflection a year from now. A new world wide financial paradigm is emerging and it is not going to be limited to just the United States.

Cash is king and our European and Asia friends who where happy to plug into our economy when things were going well aren't going to have a smooth transition.

Looking for a small bounce in the CRB Cash index than a continued drive lower before year end. The US dollar will strengthen as the overseas financial problems begin to become more transparent and their economies continue to slow down. Yes, it also means at treasury grade interest rates will be drifting lower as confidence fails and principal protection becomes a main concern.

Cash is king and it is going to take a world wide interconnected cash bucket brigade to try and control the damage. In the end; free markets and free wheeling environment gives way to regulated and managed laws with oversight and accountability.

Hard to believe that anyone really thought that bunch of self focused and highly educated people with only their profit as a motive would always act in the best interest of the financial industry and society without some sort of oversight and consumer protection.

[NY / CA]

Yes, I was confused, until I realized Trojan, like most of the hypocritical right, isn't playing with a full deck.

Confused because my spouse works in Financial Services for one of those Investment Banks that are no more, and just about every single soul we know at the top (and on down...) are all REPUBLICAN.

Do the poor, uneducated, Bible thumping Repubs REALLY not understand this simple fact? Hello...exceedingly RICH people are by and large - REPUBLICAN. THEY DO NOT WANT REGULATION (see John McCain's statement about being a "de-regulator") that would have averted the melt down we are all experiencing because it would have gone against their "free market" ideology and they would not have made as much MONEY. Hello?? This isn't a difficult concept.

I guess the GOP have pandered to the Religious - Guns / Gays / God voting block for so long that these poor folks, having been hood winked into voting AGAINST their own interests for so many years now....they don't even KNOW about that whole other **CLASS** of Republicans...the true "elitests" who run all the biggest corporations, have any number of loopholes so they pay almost no taxes if they don't actually get money back each year, who own all of those houses in the Hamptons and Park Avenue apartments and summer in Provence.....They are all REPUBLICANS.

It's VERY odd to hear the Republicans with their new "Populist" message - behaving as though they are the new "Party of the People"! Since when?? Do the poor Republicans not know that all the REALLY wealthy are REPUBLICAN and HATE people like them, thus ruling against them regularly?

Karl Rove stated publicly a few years ago that "Education is dangerous. We don't want people to be educated". Don't you see you've been conned? They like you uneducated and impressionable so they can make you believe that it's all about your God vs. those Godless Liberals...so they can stay in power and keep making boat loads of cash on Wall Street and vacationing in the Hamptons!

I guess it's a good deal if you can get it!

[PNW Trojan]

As a Republican, I saw bush for the fool that he is, and NEVER voted for him - I preferred a combat vet, like myself, not a pretentious chickensh--!! Most of you are correct (don't want to say 'right!') about the Repubs being war-mongering profiteers, who have LOOTED the People of this once dead country. But you miss the point here - after the Repubs looted everything, now, the HOME TO WALL STREET crowd (Clinton - don't forget, slick willie PARDONED a FUGITIVE Wall Street FELON - Kennedy, Frank, Dodd and LIE-bermann) see a golden opportunity to get hundreds of billions for THEIR constituents...ALL PAID BY YOU AND ME, without benefit. I ask about Pelosi et al because, they will SERVE THEIR PARTY long before you get benefits. As of now, they are talking about chump change + help for speculators, flippers and those who did not deserve a mortgage, of any kind. HOPE you enjoy the painful bail out of the Northeast...while Calif sinks further and further into the QUAGMIRE. BTW; nothing in Calif proves that the Dems aren't as corrupt and greedy as the FREAK Right - MIRROR IMAGES! xoxoxo

[earth lng]

PNW Trojan is totally on target! It is time to get rid of all labels --- especially the alleged "party" labels. We need limited government with strict term limits for all -- including judges. It is high time for the brain-washed lowing herd to wake up to reality! Our once-free nation is being raked over the coals by all the greedy, power-hungry idiots who are supposed to be OUR servants. Wake up Americans before it gets so bad that Nero will begin tuning up his fiddle!