Goldman and Morgan Stanley to be regulated by Federal Reserve

The Federal Reserve approved the two bank's transformation into bank holding companies regulated by the central bank, effectively ending Wall Street's investment banking model and subjecting the two to much tighter regulation.

In return it gives Goldman Sachs and Morgan Stanley greater access to central bank funds and makes it easier for them to buy retail banks.

By becoming bank holding companies, the firms are agreeing to significantly tighter regulations and much closer supervision by bank examiners from several government agencies rather than only the Securities and Exchange Commission. After the decision, the firms will look more like commercial banks, with more disclosure, higher capital reserves and less risk-taking.

With the new regulation, the companies will have access to the full array of the Federal Reserve’s lending facilities which will help them avoid the fate of Lehman Brothers that filed for bankruptcy last week, and Bear Stearns and Merrill Lynch — both of which agreed to be acquired by big bank holding companies.

“We believe that Goldman Sachs, under Federal Reserve supervision, will be regarded as an even more secure institution with an exceptionally clean balance sheet and a greater diversity of funding sources,” Lloyd C. Blankfein, the chairman and chief executive of Goldman, said in a statement on Sunday night.

John J. Mack, the chairman and chief executive of Morgan Stanley said “This new bank holding structure will ensure that Morgan Stanley is in the strongest possible position — with the stability and flexibility to seize opportunities in the rapidly changing financial marketplace,” the New York Times reported.

A PART OF BAILOUT PLAN
The move is the latest effort by the U.S. authorities to restore calm to chaotic financial markets follows frantic weekend talks between the Bush administration and the Congress on the bailout scheme to prevent further financial market turmoil from hurtling the economy into a severe recession.

The largest-ever bank rescue would give sweeping powers to the U.S. Treasury to buy up toxic mortgage-related debt from financial firms, including U.S. subsidiaries of foreign banks.

The bailout plan follows a wrenching week that transformed Wall Street with Lehman Brothers' failure, the agreed sale of Merrill Lynch & Co and a government takeover of ailing insurer AIG. It was also possible that within days, Morgan Stanley would accept a partner.

Asia stocks rose on Monday as details of the plan emerged, but the U.S. dollar eased and U.S. Treasury debt prices edged up as investors played it safe before the mechanics of the plan are worked out.

 Photo: Reuters