Washington: Goldman Sachs and Morgan Stanley gave up their cherished investment banking status in return for cover under the Fed’s wing to survive a financial storm that US authorities aim to tackle with a $700 billion bailout plan.
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.
“It creates a perception of greater safety and supervision. It really rationalizes the regulatory system. It should be good for both Goldman Sachs and Morgan Stanley,” said Chip MacDonald, mergers partner at law firm Jones Day.
The move is the latest effort by the US 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 US Treasury to buy up toxic mortgage-related debt from financial firms, including US 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.
Democratic leaders in Congress promised swift action, but also want to throw a lifeline to homeowners, not just Wall Street. With the economy issue No. 1 in an election less than six weeks away, lawmakers are striving to get a plan in place by week’s end, fearing that delay could send markets reeling.
Elsewhere, central banks in Japan and Australia pumped more cash into their money markets and Australia’s financial regulator slapped a ban on short selling to stabilise the stock market.
Two key questions remained unanswered even after Treasury Secretary Henry Paulson appeared on four television talk shows to press his case for emergency action. What price will the United States pay for these bad debts, which have spawned the worst financial storm since the Great Depression? When will it start buying them?
Paulson cast the proposed market intervention as a lesser evil, arguing the consequences of inaction would be so dire that the large burden on taxpayers would be worth it.
Democrats, who control both chambers of Congress, began to swap proposals with the Treasury, including checks on the nearly unfettered power the administration sought for the Treasury secretary.
“Democrats believe a responsible solution should include independent oversight, protections for homeowners and constraints on excessive executive compensation,” said California Democratic Rep. Nancy Pelosi, the Speaker of the House of Representatives.