Fed now will regulate Goldman, Morgan as banking firms
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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)