I think it makes it easier to access potential bailout funds. The ultimate private bank ensures investment banks are treated equitably.(SNARK!!!)

Kiss the last independent investment banks goodbye. And with this change, it is going to become much harder for Goldman and Morgan Stanley to make (or lose) money given leverage will be reduced to 12 instead of 30-40.

Goldman Sachs, Morgan Stanley to Become Bank Holding Companies

Throwing in the towel?

snark(sorry).....

_{"The mythical John McCain is an affable, straight-talking, moderately conservative war hero who is an expert on foreign policy" - Bob Herbert}

They get to buy other banks, they get access to the real credit windows at the Fed, they (or their banks, anyways) get access to FDIC protection, so it should be easy for them to buy WaMu or whatnot. As a deposit bank (holding company), rather than an investment bank, they get extra protection. It signals the end of shadow banking as they move into the limelight, so it make it easier to say 'look, we're the good bankers!' and also to say, 'help us! we're the good bankers!'

They're trying to survive.

max
['In the old West, it would be said that they hung up the sixguns and reformed.']

They always wanted access to the discount window, and when they got it, it raised all sorts of questions about why they should get the greatest privilege of a bank without paying any of the penalties. Pretty soon, though, the Fed was beginning "reviews" that were a lot more intensive than anything they had ever experienced under the SEC, but for the investment banks it was too late. They didn't dare wean themselves from Fed funding, and they had to resolve their peculiar status by giving up their investment banking charters.

So goodbye Morgan Stanley and Goldman Sachs. Welcome to the club of 10:1 leverage, Basel II capital restrictions, and paltry little bonuses of $2 million for superstars. Expect the exodus of high-priced bankers to begin soon to hedge fund land, which looks a lot like the old investment banks for the time being.

The SEC is going to have to scramble to find a role for itself or disappear. This means the race is on to see whether the SEC or the Fed gets to regulate the hedge funds.

None of this solves two critical questions. One, should the bond/equity raising business be carved out of banking, as it was under Glass-Steagall, to avoid conflict of interests? If so, you will see a much reduced, non-leveraged brokerage business arise, torn out of BOA/Merrill, JPM Chase, Citi/Salomon, etc. It's not clear at this stage whether the Fed doesn't believe enough in its oversight capabilities to really want to break up these conglomerates.

Second, can the nation tolerate any more of these too big to fail institutions? With all the consolidation going on, we have a worse potential for systemic risk than ever before.

By the way, sell the stock of both Morgan Stanley and Merrill Lynch. They won't be making 30% ROE's ever again.

Goldman and Morgan Stanley scrap Wall Street model

good explanation article here, it is from the WSJ but posted in full at FT..it won't let me C&P anything tho :(

Thoughts about the Fed’s acceptance of the two investment firms of Morgan Stanley and Goldman Sachs as banks, from Reggie Middleton:

“Here we have the potential for guaranteed conflicts of interest arising - which is why he needs immunity from judicial and congressional review - the ULTIMATE cronyism. This is how he will assist them in plugging those equity holes and cure insolvency-itis. By default, the treasury secretary has a conflict in even dealing with Goldman Sachs since he was the damn CEO of the company!!! Help me out here ladies and gents. What am I missing?!”

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Seems the Fed Secretary, Paulson, is intent on shovelling (outsourcing) bad investments from the market to the public. The banks or other brokerage houses wouldn't accept them in trade, but now a way has been found for the taxpayer to take on the responsibility for them.

Interestingly enough there wasn't room for Merrill Lynch, a competitor of Goldman Sachs, but through the London Office of Barclay's, don't they also have access to the discount window!

Fascinating comment in that blog, "You see, in all of the previous meetings between the bankers and the Fed, or larger meetings with the Fed and Treasury, there was an Elephant in the room. This Elephant is the market in derivatives, and precisely in it’s largest part, the market in Credit Default Swaps.

This Elephant is larger than all other players combined. This Elephant is what causes fear. This Elephant is why the measures taken so far have been done the way they have been done.

The CDS market is unregulated but is like insurance. Just like an entertainment company can buy a life or disability policy on an actor while the film is in production, or an actor could insure his nose, legs, or voice, the purchaser of a Mortgage Backed Security or a Bond, can buy insurance against the default of that security or bond. However, this is not a regulated insurance contract and what constitutes a default in one CDS contract is often different from another CDS contract. Thus only civil courts can clear these.

These CDSs are contracts or betting slips, and the biggest bookie was AIG. AIG is not an insurance company but a holding company that owns regulated insurance companies, who do not write CDSs, and unregulated companies who do write CDSs.

Furthermore, the value of these CDSs is what separates most banks from insolvency. That is, if the value of these contracts is in doubt, the FDIC has to take over the bank.

These takedowns of Bear, Fannie, Freddie, and AIG ( and today’s morphing of Goldman and Morgan into banks) were all done in a way to avoid triggering these ‘default’ events and a cascade to oblivion in the CDS market.

The Elephant is still in the room, and thus the danger is still with us."

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As I had suspected, the derivatives are what no one wants to trade but badly needs palming off. It's a huge segment that ultimately could replace cash markets. It is currently straining liquidity.

How to unwind leverage ... GS buys real banks, issues stock for same. Now they can buy 100 pct because they are inside the tent. Anything not pleasant to hold, can be passed on to Mr Paulson. Result is continuation of effectively unlimiited leverage. Watch for roll-up of banks into the most highly leveraged entities, ie GS et al. The Fannie and Freddie lobbying show will continue.