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Originally published Monday, September 22, 2008 at 12:00 AM

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Fed gives 2 investment banks new look

In one of the most sweeping changes on Wall Street in decades, Goldman Sachs and Morgan Stanley, the last two independent investment banks...

NEW YORK — In one of the most sweeping changes on Wall Street in decades, Goldman Sachs and Morgan Stanley, the last two independent investment banks, will become bank holding companies, the Federal Reserve said.

The move fundamentally changes one of the mainstay models of modern Wall Street, the independent investment bank, soon after the federal government unveiled the biggest market rescue since the Great Depression. It heralds new regulations and supervisions of previously lightly regulated investment banks. It is also the latest signal by the Federal Reserve that it will not let Goldman or Morgan fail.

The move comes after the bankruptcy of Lehman Brothers and the near-collapses of Bear Stearns and Merrill Lynch.

Announced without fanfare Sunday night, the move signals the final end to the Glass-Steagall Act, the epochal legislation of 1933 that signaled a split between investment banks and retail banks. A law passed in 1999 repealed the earlier regulation, though Goldman and Morgan remained independent investment banks.

Now, Goldman and Morgan Stanley, which have been the subject of merger speculation in recent weeks, can become direct competitors to larger firms such as Citigroup, JPMorgan Chase and Bank of America. Those firms combine investment-banking operations with the larger capital cushions that come with retail deposits, giving them a stability that pure investment banks lack.

By becoming bank holding companies, Goldman Sachs and Morgan Stanley gained some breathing room in the immediate term.

Copyright © 2008 The Seattle Times Company

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