Goldman, Morgan Stanley Become Bank Holding Companies

The Federal Reserve just made an important announcement Sunday night: "The Federal Reserve Board on Sunday approved, pending a statutory five-day antitrust waiting period, the applications of Goldman Sachs and Morgan Stanley to become bank holding companies."

Goldman Sachs (GS) and Morgan Stanley (MS) were the last two major investment banks left standing amidst the chaos. I can only assume that this transformation paves the way for the Federal Reserve to provide more direct assistance to GS and MS. It also allows the government to more tightly regulate these companies. More regulation will certainly mean less risk-taking and lower profits.

The high-octane business model of using leverage to super-charge profits should end. So, now that the stocks of GS and MS will trade like banks, are they really worth $130 and $27, respectively? I doubt it. But we might not know what the market really thinks about all this until the ban on short-selling is lifted on October 2, 2008.

I would post charts and speculate on what the technicals hold, but I do not think technicals matter as much when the rules of the game are subject to change at any time at the whim of the government.

I post the rest of the Federal Reserve's statement below. The Fed is fully committed to making sure these firms can function as normally as possible, all things considered:

To provide increased liquidity support to these firms as they transition to managing their funding within a bank holding company structure, the Federal Reserve Board authorized the Federal Reserve Bank of New York to extend credit to the U.S. broker-dealer subsidiaries of Goldman Sachs and Morgan Stanley against all types of collateral that may be pledged at the Federal Reserve's primary credit facility for depository institutions or at the existing Primary Dealer Credit Facility (PDCF); the Federal Reserve has also made these collateral arrangements available to the broker-dealer subsidiary of Merrill Lynch. In addition, the Board also authorized the Federal Reserve Bank of New York to extend credit to the London-based broker-dealer subsidiaries of Goldman Sachs, Morgan Stanley, and Merrill Lynch against collateral that would be eligible to be pledged at the PDCF.

Be careful out there!

Full disclosure: No related positions.

Comments

[Moon Kil Woong:]

Look at the text. All financial agencies are to become agents of the government. That technically makes them part of the Treasury as well as every other bank employee. Welcome to a socialist republic. See section 2 #3 for the nice wording turning your bankers into government employees.

2008 Sep 22 03:01 AM

[Moon Kil Woong:]

Here is the wording of the 700 billion bailout package... Including the federalization of bank employees if you are incredulous.

www.nytimes.com/2008/0...

2008 Sep 22 03:04 AM

[ineedacookie:]

Well, here’s something that goes beyond the trivial discussions that go on within seekingalpha; Something that’s beneficial & important especially to you here on seekingalpha. Today we are going through a financial crisis in the world and its concentrated within the US. Changes are occurring at a rapid pace and we have reached a point right now where we have hit a crossroad for what the world's future would be like the next decade; (1) one road leads to a collapse of our economic system that will destroy the country's ability to preserve jobs & create future jobs, lead to destruction of the remaining value of what we own & earn, lead to higher costs for you, your family (grandparents & sons & daughters), and friends who'll no longer be able to scrape by to pay for housing, food, healthcare, and transportation, and lead to government control that goes beyond anything we can imagine today; OR (2) the other road that leads to flushing our economic system to preserve our ability to create future jobs, save the value of our livelihoods & standard of living for all of us, and salvage our base freedoms & rights to prosperity-which have been undermined but we need to atleast preserve the base that we have today so we can fight to reclaim all our freedoms & deserved rights that any world citizen should enjoy.

Anyways, this is what brought me out of my apathy, getting turned on to an amazing man fighting for us, Karl Denninger who put up this 10 min video that lays out what happened to our financial system from banks down to us these past 5 yrs in a comprehensive, logical manner;
www.youtube.com/watch?...

Here is the SOLUTION he posted today, September 21, 2008. Very important - Watch this:
www.youtube.com/watch?...
Again this solution is a document you can read through and has been submitted to the senate this weekend. It has been hand-signed and distributed to each member of the Senate Banking Committee and hopefully is considered there.

This is the solution & the best, realistic shot at starting to address & fix the problems we are facing today. All I ask of you is to check out the videos, consider it, think about it, discuss it, share it with others, distribute it please. At the very least this will create much needed discussion amongst us for a realistic solution today or at the very best it will lead to the first step in many to halt a finacial collapse & stop a government shutdown on the people, preserve our ability to financial prosperity and ability to get a job (a good paying one in this country), and provide an example for others to follow. It can lead to a much brighter future for our ourselves, our families, and friends.

Please tell me what you think and copy/paste this to others you know.

Thank You,
Pete
(I had not had any communications with Karl Denninger, however since he moved me to get out of my seat & do this, I copied and pasted this message to him and I hope he appreciates this message as a token of respect to the message he is fighting to get out to the rest of us).

2008 Sep 22 03:42 AM

[Reinko:]

The two above mentioned vids are nice, but for me they contain nothing new. Of course this 700 billion bailout plan will fail because it is far too small.

Don't forget this administration has done more completely weird stuff: Tax cuts so that the economy would grow so fast and long that in the end there would be more taxes instead.
Economic stimulus packages that are pissed away by now; drinking beer and eating bread and meat does not give good grow for the economy...

And now this dumb plan, my calculations indicate that in the US financial sector only the toxic debt will grow with at least 900 billion a year. And these are not credit card loans or car loans, these are loans done by US financial institutions...
Up to the tune of at least 900 billion a year!

Check for yourself, here is the FED file & look in the one before last column:

www.federalreserve.gov...

Doesn't it clearly say: US fin sector total debt = 16507.5 billion US$

Ha! Far above one GDP so lots of that will never get paid back.
Fairy tales that only 700 billion will do it's magical work can only come from dumb people!

2008 Sep 22 08:13 AM

[JohnKing:]

King Henry Paulson just opened the window to save his buddies at Goldman.

These entities are no longer viable as investment banks, they go under no matter how much Paulson is able to steal from the Treasury.

If a baker turns into a butcher, is he still a baker?

2008 Sep 22 08:21 AM