Fed Allows Goldman, Morgan Stanley to Become Banks (Update2) ..........................
By Craig Torres
Sept. 21 (Bloomberg) -- Goldman Sachs Group Inc. and Morgan Stanley will become banks regulated by the Federal Reserve, after tight credit markets forced Wall Street's two remaining independent investment banks to widen their sources of funding.
The Federal Reserve Board approved the applications of both firms to become bank holding companies, the Fed said today. Fed officials also increased the two securities firms' ability to take out direct loans from the central bank, granting access against a wider pool of collateral.
Goldman and Morgan Stanley turned to the Fed after a week that saw Lehman Brothers Holdings Inc. collapse and Merrill Lynch & Co. sell itself to Bank of America Corp. The upheaval on Wall Street raised questions about the two firms' ability to survive without cheaper funding, prompting Morgan Stanley to start merger negotiations with Wachovia Corp.
``The decision marks the end of Wall Street as we have known it,'' said William Isaac, a former chairman of the Federal Deposit Insurance Corp. ``It's really too bad, as our country has benefited greatly from the entrepreneurial risk takers on Wall Street.'
Allowing the firms to access direct loans from the central bank will ``provide increased liquidity support to these firms as they transition to managing their funding within a bank holding company structure,'' the Fed said.
Morgan Stanley shares slumped as much as 69 percent last week, ending the week 27 percent lower. Goldman fell 16 percent in the same period.
Deal Less Likely
The Fed Board also authorized the New York Fed to lend to the London-based broker-dealer subsidiaries of Morgan Stanley, Goldman Sachs, and Merrill Lynch & Co., the securities firm that agreed to a takeover by Bank of America Corp. earlier this month.
As recently as Sept. 16, Morgan Stanley Chief Executive Officer John Mack said he was ``confident'' in the company. Chief Financial Officer Colm Kelleher told investors that the firm believed in its own business model, adding that ``depository institutions do not necessarily better enable us to execute our business and in fact may bring with them their own set of complications.''
The Fed decision may make Mack, 63, less willing to team up with Wachovia, said Gerard Cassidy, an analyst with RBC Capital Markets in Portland, Maine.
``This makes a deal between Morgan Stanley and Wachovia much less likely,'' Cassidy said. ``These companies had to do something. They weren't likely to remain independent in structure.''
To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net.
Last Updated: September 21, 2008 23:32 EDT
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