Ravaged Wall Street giants to come under the purview of the Federal Reserve. Morgan Stanley and Goldman Sachs are no longer SEC-regulated investment banks.

Instead, they've been granted the status of bank holding companies under the supervision of the Federal Reserve System. The New York-based firms, whose share prices have been ravaged in a year-long crisis of confidence in diversified financial companies rooted in the subprime-mortgage meltdown, say their new status allows them to provide Federal Deposit Insurance Corporation coverage for a larger swath of deposits as well as direct access to liquidity at the Fed's "discount window."

The tradeoff against these benefits is tighter capital requirements that will damp their ability to run on borrowed money and so, potentially, make them much less profitable.

"This new bank holding structure will ensure that Morgan Stanley is in the strongest possible position -- with the stability and flexibility to seize opportunities in the rapidly changing financial marketplace," says Morgan Stanley's CEO John Mack. "It also offers the marketplace certainty about the strength of our financial position and our access to funding."

Port in a storm

Lloyd Blankfein, Goldman Sachs' CEO, says his firm's "decision to be regulated by the Federal Reserve is based on the recognition that such regulation provides its members with full prudential supervision and access to permanent liquidity and funding."

Goldman Sachs says the Fed has been reviewing its "liquidity and funding profile, capital adequacy and overall risk management framework" -- presumably with a view to OKing its move to commercial-bank status -- since the spring of 2008.

"We are pleased that the Federal Reserve recognizes the strength and health of our liquidity and funding and the overall quality of our risk management," Goldman Sachs says in a press release. "We have maintained our Tier 1 capital levels well above the Federal Reserve's 'well-capitalized' threshold of 6 percent since these ratios were first calculated in 2004."

After taking severe beatings last week in a few tumultuous days that saw Lehman Brothers file for bankruptcy, Merrill Lynch announce that it would become part of Bank of America and insurance giant AIG join mortgage-market makers Fannie Mae and Freddie Mac as U.S.-government bailout cases, Morgan Stanley's and Goldman Sachs' share prices have been on the mend. That's probably thanks to Last Wednesday's news that the U.S. federal government and related agencies would drop $700 billion to keep U.S. financial firms afloat -- and since a ban on "naked" (that is, temporarily uncovered) short selling of stocks was expanded into a temporary ban on all short sales of financial-company stock.

To facilitate its conversion to commercial-bank status, Morgan Stanley says it will get a national charter for its Utah-chartered industrial bank and "pursue initiatives to expand the retail banking services it offers its retail clients and build a stable base of core deposits."

Goldman Sachs, which owns a deposit-taking entity called Goldman Sachs Bank USA, was a little clearer about how it intends to build out its commercial-banking business.

"We are moving assets from a number of strategic businesses, including our lending businesses, into [Goldman Sachs] Bank USA," Goldman Sachs says in a press release. "We intend to grow our deposit base through acquisitions and organically."

So, working from a base of about $20 billion in customer deposits in Goldman Sachs Bank USA and its European counterpart Goldman Sachs Bank Europe,  Goldman Sachs intends to buy banks in order to boost deposits with particular focus on distressed banks, according to Reuters.

Morgan Stanley says it had more than 3 million retail accounts and $36 billion in bank deposits on 31 August 2008. -FWR

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