Switch ends era on Wall Street

Traffic passes Morgan Stanley's headquarters in New York. On Sunday, the Fed granted Morgan Stanley and Goldman Sachs permission to become banks instead of securities firms. Traffic passes Morgan Stanley's headquarters in New York. On Sunday, the Fed granted Morgan Stanley and Goldman Sachs permission to become banks instead of securities firms. (Mark Lennihan/Associated Press)
Bloomberg News / September 23, 2008
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NEW YORK - The Wall Street that shaped the financial world for two decades ended Sunday night, when Goldman Sachs Group Inc. and Morgan Stanley concluded there is no future in remaining investment banks now that investors have determined the model is broken.

The Federal Reserve's approval of their bid to become banks ends the ascendancy of the securities firms, 75 years after Congress separated them from deposit-taking lenders, and caps weeks of chaos that sent Lehman Brothers Holdings Inc. into bankruptcy and led to the rushed sale of Merrill Lynch & Co. to Bank of America 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 too bad."

Goldman, whose alumni include Henry Paulson, the Treasury secretary presiding over a $700 billion bailout, and Morgan Stanley, a product of the 1933 Glass-Steagall Act that cleaved investment and commercial banks, insisted they didn't need to change course, even as their shares plunged and their borrowing costs soared last week.

By then, it was too late. As financial markets gyrated and clients defected, executives at the two firms concluded they had no choice. The Federal Reserve Board met at 9 p.m. Sunday and considered applications delivered that day, said a spokeswoman for the central bank. The decision was unanimous, she said.

Wall Street hasn't had such a shakeup since the 1980s, when firms including Morgan Stanley and Bear Stearns Cos. went public and London's financial markets were altered forever with the so-called Big Bang reforms in 1986. Bear Stearns disappeared in March, when it was bought by JPMorgan Chase & Co.

The announcement paves the way for the two New York-based firms, both of which will now be regulated by the Fed, to build their deposit base, potentially through acquisitions. That will allow them to rely more heavily on deposits from retail customers instead of using money borrowed in the bond market - the leverage that led to the undoing of Bear Stearns and Lehman.

Morgan Stanley has taken $15.7 billion of write-downs and losses on mortgage-related securities and other types of loans since the credit crunch started last year. Goldman's tally stands at about $4.9 billion. While both companies have remained profitable and avoided money-losing quarters suffered by Lehman and Merrill Lynch, their revenue from sales and trading and investment banking has been declining this year.

Mitsubishi UFJ Financial Group Inc., Japan's largest bank, said yesterday it will pay up to $8.4 billion for as much as a fifth of Morgan Stanley.

The deal came after Morgan Stanley held talks last week to pursue a merger with Wachovia Corp. That deal became less likely now that Morgan Stanley is becoming a bank holding company, said Tony Plath, a finance professor at the University of North Carolina at Charlotte.

Goldman Sachs may raise capital to acquire assets "if we see assets that are attractive," Lucas van Praag, a spokesman for Goldman in New York, said.

Morgan Stanley, the second-biggest securities firm until this week, had $36 billion of deposits and 3 million retail accounts at the end of August. The company won approval from the Office of the Comptroller of the Currency yesterday to convert its Utah-based industrial bank into a national banking association to be called Morgan Stanley Bank, National Association.

Goldman, the largest and most profitable of the US securities firms, will become the fourth-largest bank holding company. The firm already has more than $20 billion in customer deposits in two subsidiaries and is creating a new one, GS Bank USA, that will have more than $150 billion of assets, making it one of the 10 largest banks in the United States, the firm said. The firm will increase its deposit base "through acquisitions and organically," Goldman said.

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