Goldman, Morgan Switch To Bank-Holding Firms

The Federal Reserve says it 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.

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The Fed announced late Sunday that it had approved the request of Goldman and Morgan .

The change in status will allow them to create commercial banks that will be able to take deposits, bolstering the resources of both institutions.

It also will put them directly under the regulatory supervision of the U.S. central bank.

To provide increased liquidity to the companies, the Fed agreed to lend to the firms' broker-dealer subsidiaries on the the same terms as the Fed discount window for banks and the central bank's Primary Dealer Credit Facility lending window for investment banks.

It said it was making the same collateral deals available to the broker-dealer subsidiary of Merrill Lynch .

WALL STREET IN CRISIS - A CNBC SPECIAL REPORT
WALL STREET IN CRISIS - A CNBC SPECIAL REPORT

The change continued the biggest restructuring on Wall Street since the Great Depression.

Because of the change, Morgan Stanley is unlikely to do some kind of deal with Wachovia or even get a cash infusion from the Chinese government.

Shares of both institutions had come under pressure ever since the bankruptcy filing last week by investment bank Lehman Brothers and the forced sale of investment bank Merrill Lynch to Bank of America .

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Investors feared that the last remaining independent investment banks would not be able to survive in their current form.

There had been speculation that both institutions would be acquired by commercial banks, whose ability to take deposits would give them a stable source of funding.

The decision by the two giants of finance to get approval from the Fed to change their own status represented another dramatic development in one of the most turbulent periods in Wall Street history.

In the surprise announcement late Sunday, the central bank said that to provide increase funding support to the two institutions during the transition period, they would be allowed to get short-term loans from the Federal Reserve Bank of New York against various types of collateral.

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The Fed said its action would take final effect after a five-day waiting period required under law.

The decision means that the Goldman and Morgan Stanley will be able not only to set up commercial bank subsidiaries to take deposits, giving them a major resource base, but they will also have the same access as other commercial banks to the Fed's emergency loan program.

After the collapse of Bear Stearns and its forced sale to JP Morgan Chase last March, the Fed used powers it had been granted during the Great Depression to extend its emergency loans to investment banks as well as commercial banks.

However, that extension was granted on a temporary basis.

But as commercial banks, Goldman Sachs and Morgan Stanley will have permanent access to emergency loans from the Fed, the same privilege that other commercial banks enjoy.

The action by the Fed's board of governors in Washington came on a day when the Bush administration continued to campaign for quick congressional approval of its request for authority to use $700 billion to purchase a mountain of bad mortgage debt held by financial companies.

The effort represented the boldest action yet aimed at stabilizing chaotic financial markets.

Democrats in Congress said they would demand provisions in the bailout measure to protect people in danger of losing their homes as well as seeking to cap executive compensation at firms who get to unload their bad mortgages debt onto the government.

But the proposal was expected to win quick congressional passage because both parties are concerned about the adverse reaction in financial markets should the measure look like it was being delayed.

—Reuters and AP contributed to this report.