Goldman Sachs and Morgan Stanley to become holding companies!

Companies get access to Fed lending in exchange for oversight.

WASHINGTON - September 22, 2008 - In yet another extraordinary development for Wall Street, the Federal Reserve said late Sunday night that venerable investment banks Goldman Sachs and Morgan Stanley will become bank holding companies, subjecting them to stricter federal oversight.

The move will subject the companies to the same rules that pertain to traditional banks like Citigroup and J.P. Morgan Chase, and they will need to maintain specific capital reserves. The move will place the firms under stricter regulatory control and will reign in the leverage, or borrowing.

The Federal Reserve will now be their primary regulator, replacing the Securities and Exchange Commission.

The Wall Street titans will be allowed to transition into holding companies following a mandatory five-day waiting period, and will be able to take advantage of credit from the Federal Reserve Bank of New York in order to complete the transition.

"It would appear that over the long term, the new financial system will be built around the commercial bank model," Ladenburg Thalmann analyst Dick Bove said Monday.

In becoming holding companies, Goldman and Morgan would get access to the Federal Reserve's emergency lending facilities. But that access comes at a price: greater scrutiny by regulators and new capital requirements.

Amid the greatest shakeup on Wall Street since the Great Depression, Morgan Stanley has been considering a merger with Wachovia or another bank, and Goldman Sachs had also been under pressure as markets swooned last week.

Now, with its conversion to a bank holding company, Morgan Stanley will likely shelve any plans to merge with Wachovia. Both Morgan and Goldman will now likely pursue the purchase of other banks to beef up their balance sheets.

In a short statement on its Website, the Fed said it authorized the New York Fed to extend credit to U.S. broker-dealer subsidiaries of Goldman and Morgan against all types of collateral that can be pledged at the Fed's primary credit facility for depository institutions.

The Fed also made the same collateral arrangements available to the broker-dealer subsidiary of Merrill Lynch.