The Federal Reserve in light of exigent circumstances affecting the financial markets has approved the applications of Goldman Sachs (GS) and Morgan Stanley (MS) to become bank holding companies. The move allows both firms to create commercial banks which can receive deposits and in turn help increase their tangible resources.
The extraordinary and unprecedented move allows the last two remaining top tier Wall Street investment houses relinquish their investment bank status, and places them under supervision by bank regulators.
In a statement the Fed said its board based on all the facts of record, concluded that the conversion would not result in any significantly adverse effects on competition or on the concentration of banking resources in any relevant banking market — permitting the Board to approve the applications of Goldman Sachs and Morgan Stanley with total consolidated assets of approx. $1.1 trillion and $1.0 trillion, respectively, to become bank holding companies. The Fed also authorized credit to the two firms “against all types of collateral” that commercial banks can use to get central bank loans.
The Fed also stated that both investment houses are adequately capitalized and within the applicable federal guidelines.
Goldman Bank has approx. $25 bln in total consolidated assets with $23 bln in deposits. Morgan Stanley Bank, has a total of $38.5 bln in consolidated assets with approx. $30 bln in deposits. The Fed also made these collateral arrangements available to the broker-dealer subsidiary of investment firm Merrill Lynch (MER), which was bought a week earlier by Bank of America (BAC).
The announcement completes an overhaul of the structure of the banking industry, which had been broken up in the 1930s into commercial and investment banks. Investors are now awaiting further steps in the U.S. government’s plan to purchase nearly $700 billion in mortgage debt and toxic assets from ailing banks and brokerages.