Why Goldman and Morgan are Becoming Bank Holding Companies
Goldman Sachs and Morgan Stanley have announced that they will become bank holding companies subject to greater regulation, changing Wall Street and ending the investment banking model that had been its signature.
The banks had relied on short-term loans to make investments, but the source of that cash has dried up during the mortgage crisis.
The change will give the banks full access to the Federal Reserve’s lending facilities, the New York Times reports. It also allows the banks to take customer deposits, the Wall Street Journal reports (sub. req.). In exchange, the firms will be subject to more disclosure and higher reserve requirements.
The move may also allow the two banks to avoid using mark-to-market accounting, which requires an accounting of assets based on current market price, the Wall Street Journal story says. Instead they may be able to identify assets as “held for investment.”
The change puts the banks in a better position to be acquired, to merge, or to acquire smaller companies with insured deposits, the Wall Street Journal story says.
The banks were the only two big U.S. investment banks left after Lehman Brothers failed and Merrill Lynch agreed to be purchased, reports.
Sullivan & Cromwell chairman H. Rodgin Cohen, a top adviser to financial institutions, told the Wall Street Journal that these actions “constitute a powerful statement by the Federal Reserve as to its views on the safety and soundness of these institutions.”
