US/world financial crisis

Last American investment banks disappear

Article published on the 2008-09-22 Latest update 2008-09-22 16:23 TU

US Treasury Secretary Henry Paulson.
(Photo: Reuters)

Morgan Stanley and Goldman Sachs, the US’s last two investment banks, agreed to convert to holding companies Sunday night, which would subject them to far more regulatory oversight, but reassure investors of their financial soundness. World markets recovered modestly after hearing the news.

The banks asked for the status-change to be included in the Fed’s historic 700 billion dollar (476 billion euro) plan, announced Sunday evening, to buy up bad investments with public money to avoid an international financial meltdown.

It’s the end of an era of high-risk, high return investment banking so lauded and derided for decades. In asking for the change, Wall Street’s two most prestigious banks are attesting to the severity of the financial storm brewing since the credit crisis began last year.

With the banks’ conversion, Wall Street - a term that refers to the elite independent brokerage firms who trade securities and are less regulated than traditional banks – will cease to exist.

After Lehman Brothers filed for bankruptcy last week, and the planned buyout of Merill Lynch by the Bank of America, Morgan Stanley and Goldman Sachs were the only two remaining investment banks in the United States.

As a result of the change, the two banks, which vowed only last week to keep their business model, will come under strict supervision of bank regulators that would require them to keep much more cash on hand to guarantee their investments.

On Monday, Japan’s largest bank Mitsubishi UFJ Financial Group said it would buy 20 per cent of Morgan Stanley for 8.4 billion dollars (5.7 billion euros).

Meanwhile, Goldman Sachs will become the US’s fourth-largest holding company, and will concentrate on expanding its deposit base “though acquisitions and organically”, the firm said in a statement.

“Goldman Sachs, under Federal Reserve supervision, will be regarded as an even more secure institution with an exceptionally clean balance sheet and a greater diversity of funding souces,” Lloyd Blankfein, Goldman’s CEO, said in the statement.