Tuesday, September 23, 2008

Goldman Sachs and Morgan Stanley Welcome New Regulation as Part of Credit Crisis Solution

Goldman, Morgan Stanley to Become Regulated Banks, Financial Times
Goldman and Morgan Shift Marks End of Era in Finance, New York Times

The era of huge, unregulated Investment Banks and their domination of the Wall Street culture has, at least for now, come to an end. On Monday, the Federal Reserve announced that, as part of their efforts to stay afloat in the increasingly tumultuous financial climate, the two remaining large investment banks (Morgan Stanley and Goldman Sachs) would officially become "bank holding companies."

As bank holding companies, Morgan Stanley and Goldman Sachs will be subject to full regulation by the Federal Reserve, just as major commercial banks have been for years. The deal struck with the Federal Reserve will require the investment banks will surrender their rights to make aggressive use of their own capital--and debt--to make major deals and transactions with little or no government oversight.

The loss of certain financial freedom does not, however, come without substantial benefits to these banks. In exchange for opening themselves to increased regulation, Morgan Stanley and Goldman Sachs will avail themselves of the substantial loans that the Federal Reserve is allowed to make to commercial banks. Such loans and the liquidity they provide may prove essential to the two banks' survival as the consequences of the worsening credit crisis come to fruition over the next weeks and months.

1) Was the Federal Reserve correct to allow Morgan Stanley and Goldman Sachs to change their classification thereby availing them of billions of dollars in Federal Reserve loans? What role will this new financial relationship have on the immediate future of these companies? Of Wall Street?
2) How substantially will the new regulations affect the business activities of Morgan Stanley and Goldman Sachs? Of Wall Street as a whole?
3) What will be the long term effects of the removal of investment banks (in the traditional sense of the term) from the Wall Street scheme?

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