US banks make shock status switch

Posted by admin on 23 September, 2008 under Business news | Read the First Comment

The last two major investment banks in the US have changed their status to become bank holding companies, allowing them to take deposits from investors.

The changes should enable Goldman Sachs and Morgan Stanley to raise more funds by opening commercial banks.

The move – part of a huge restructuring effort on Wall Street – will also give them access to Federal Reserve support.

The US government has announced a $700bn (£382bn) package to tackle the worst financial crisis for decades.

CHANGING WALL STREET
– May 2008: JP Morgan Chase buys Bear Stearns for $2.2bn, ending its 85 years as an independent firm
– September 2008: Lehman Brothers files for bankruptcy, the largest in US history, ending its 158-year history
– September 2008: Bank of America acquires Merrill Lynch, founded in 1918, in a $50bn deal
– September 2008: Goldman Sachs and Morgan Stanley request to change their status
Congress is considering the plan, drawn up by Treasury Secretary Henry Paulson, which would set up a fund to buy up much of the bad debt held by financial institutions, which had triggered the credit crisis.

The BBC’s business editor Robert Peston said transforming these investment giants into licensed, deposit-taking banks marked the end of an era for Wall Street.

“Now that the US taxpayer is in a formal sense underwriting Goldman and Morgan Stanley, their days of buckling the swash on the worldwide high seas of finance are over, possibly for good.”

‘Greater safety’

There had been fears, given the recent turbulence in the financial markets, that Morgan Stanley and Goldman Sachs would not be able to survive as independent players, and both their share prices have come under pressure.

HAVE YOUR SAY They speak about ‘economic forces’ as if they are natural disasters – they are man made
James, Southend
Send us your commentsBoth banks had filed requests with the Federal Reserve to change their status, and late on Sunday, the Fed announced it had granted the requests.
The last few weeks have seen dramatic and unexpected changes among banks, with Merrill Lynch being bought by Bank of America and Lehman Brothers filing for bankruptcy protection.

Earlier this year, Bear Stearns was acquired by JP Morgan Chase.

Flexibility and stability

Goldman Sachs said it already had two existing deposit businesses, Goldman Sachs Bank USA and Goldman Sachs Bank Europe, into which it is transferring assets from other parts of the business.

“With over $150bn in assets, GS Bank USA will be one of the 10 largest banks in the US,” the bank said.

GOLDMAN SACHS
Founded 1869
It became a listed company in 1999 having been a private partnership
Provides investment banking, securities and investment management services
Recently reported a 70% fall in third-quarter earnings to $845m (£473m)

“We intend to grow our deposit base through acquisitions and organically,” it added.

Commenting on the change for Morgan Stanley and Goldman Sachs, Chip MacDonald, mergers partner at law firm Jones Day, said: “It creates a perception of greater safety and supervision. It really rationalises the regulatory system”.

“It should be good for both Goldman Sachs and Morgan Stanley.”

Goldman Sachs said it decided to be regulated by the Federal because it “provides its members with full prudential supervision and access to permanent liquidity and funding”.

John Mack, chairman and chief executive officer of Morgan Stanley, said: “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.”

“It also offers the marketplace certainty about the strength of our financial position and our access to funding.”

Solution sought

Mr Paulson has urged other countries to follow the American example in dealing with the international financial crisis.

MORGAN STANLEY

Founded 1935

Areas include institutional securities, wealth management and asset management

Merged with Dean Witter, Discover & Co in 1997

Recently saw third quarter earnings fall 3% to $1.43bn

Both presidential candidates have been having their say about the financial crisis.

Republican John McCain said President George W Bush should take the blame for the crisis along with both parties in Congress.

Mr McCain said he was enraged by the greed of Wall Street speculators and said the rescue plan should be funded by cutting government waste, rather than through taxation.

Meanwhile Democrat presidential candidate Barack Obama suggested Mr Paulson could be asked to play a role in his administration should he win the presidency.

But Mr Obama criticised the bail-out proposal, calling for independent supervision of its implementation.

News reported by The BBC