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Morgan-Wachovia Deal Unlikely on Fed Announcement

In yet another surprising development, the Federal Reserve has granted a request by the country's last two major investment banks — Goldman Sachs and Morgan Stanley — to change their status to bank holding companies.

With that announcement, the chances of a Morgan-Wachovia deal diminishes considerably.

The Fed's move to declare Morgan Stanley into a bank and extend credit to the firm as if it were a bank put Morgan Stanley's merger with Wachovia firmly on the back burner and possibly scuttled the deal all together, sources tell CNBC.

Morgan Stanley had been negotiating with officials from Wachovia through Sunday night for a possible merger. At the same time, Morgan Stanley had been speaking with officials with the Chinese government about a huge cash infusion.

Meanwhile, Morgan Stanley has also been dealing with Fed officials about possibly transitioning its legal structure, meaning the Fed would extend virtually unlimited credit, making Morgan Stanley less susceptible to bear runs with hedge funds pulling lines of credit.

Morgan officials were unclear Sunday as to when and if the Fed might announce the move, which is one reason why they continued talks with Wachovia and the Chinese.

But with the new powers, the Wachovia deal has been put on hold indefinitely and any potential deal with the Chinese may become unnecessary, people close to the firm said.

Concern within Goldman Sachs had been mounting for the last week, with people close to that firm saying that they would potentially merge with a bank. The Fed's move should scuttle that as well.

The change in status makes Goldman Sachs the fourth largest bank holding company in the U.S.

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