Washington: The conversion of Goldman Sachs and Morgan Stanley to regulated commercial banks marks the end of an era of independent Wall Street investment firms and a separation in the industry since the 1930s.
The change, announced late on Sunday by the Federal Reserve, closes the door on the last two major Wall Street firms as independent, largely unregulated entities.
The two firms will easier access to credit and help them ride out the financial crisis. But their conversion also ends an era of clubby and massively profitable “white shoe” investment firms operating on Wall Street.
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 under the Glass Steagall Act, to help restore confidence in the Great Depression.
“This is really the end of Wall Street as we have known it for decades if not for a century,” said Nouriel Roubini, a New York University economist who has argued that the Wall Street firms were part of an unregulated “shadow banking system” that led to speculative market excesses.
“Two decades of development of the shadow banking system - as a way to arbitrage the tighter regulations of the formal banking system - created massive financial instability and the worst financial crisis since the Great Depression,” Roubini added.
The investment banks began falling with the demise of Bear Stearns in March, which had to be rescued by JPMorgan Chase at a bargain-basement price from a death spiral because of its massive losses from the real estate meltdown.
Earlier this month, Lehman Brothers filed for bankruptcy when it failed to find a partner or government aid, and Merrill Lynch was forced into a marriage with Bank of America.
Goldman and Morgan Stanley had been the last two major independent Wall Street banks, but had been under intense pressure to find merger partners in the face of financial market storm on fears of further collapses in the sector.
The change on Wall Street “means the investment banks wanted the comfort and security of mama bear,” said Sheldon Liber, chief executive of Capital Innovations, a private investment company.
“They wanted the protection of the Federal Reserve, along with the ability to borrow from it at the discount window, and in a worst case scenario, to be bailed out like everyone else.”
Morgan Stanley said separately it had struck a deal in which Japanese megabank Mitsubishi UFJ Financial Group Inc. will buy 20% of ailing US firm in a deal worth up to $8.5 billion.
The shakeup came as the US Congress considered an unprecedented $700 rescue plan designed to bail out the troubled financial industry reeling under the weight of bad mortgage loans.
Both Goldman and Morgan Stanley have had access to Fed credit as a “primary dealer” of securities under a temporary program announced by the Fed after the collapse earlier this year of Bear Stearns. But that program is set to expire next year.
Ironically, the new landscape on Wall Street comes decades after the Depression-era rule to separate investment and retail banking due to the boom-and-bust that preceded that crisis.