Release Date: September 21, 2008
For release at 9:30 p.m. EDT

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.

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.

CR is incorrect. The result is neither more oversight nor a change in the firms' business models. Being financial holding companies (per GLB Act) both firms were supervised by the FRB and the SEC and, informally, the Presidents Working Group (PWG a/k/a "the Plunge Protection Team"). But Paulson's "Blueprint" does explicitly seek expansion of the PWG. The latter observation implies only that regulators will recommend that the firms acquire state- and national-chartered banks and perhaps apply for charters for some of their existing banking and trust subsidiaries. Further, this measure does not revoke firms' privileged brokerage licenses. Rather, it cements market risk in depository institutions --all of whose undercapitalized operations were regulated by the FRB.

BAC ("core bank") and Merrill last week agreed in principle to a merger. "Core bank" is an OCC class.

From  American Banker subscription, H/T Jesse:

Goldman did not say what sort of banking charter it would use, but Morgan Stanley said it plans to convert its Utah industrial bank to a national bank charter. Morgan Stanley said it had more than 3 million retail accounts and $36 billion in bank deposits as of Aug. 31. It did not reveal its Tier 1 capital ratio.

Morgan said it would "pursue initiatives to expand the retail banking services it offers its retail clients and build a stable base of core deposits."

Recall: currently, - $122B non-borrowed funds of the reserve bank system (cumulative since Dec 2007). The FRB is shifting cost of banking to Treasury and revenue generation to debt marketing.

From "Blueprint for a Modernized Regulatory Structure" released 26 March 2008 (graphics by myself); this is the "Short Term Recommendation" which I predicted in a series of April articles would become permanent.

Diversity is the key to economic and political evolution.