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Goldman Sachs and Morgan Stanley- bank holding firms. America- a new socialist republic?

By Amarendra Bhushan for CEOWORLD Magazine Updated:September 22, 2008

So much for a free market economy. 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. More regulation will certainly mean less risk-taking and lower profits. So, now that the stocks of GS and MS will trade like banks, are they really worth $130 and $27, respectively? I doubt it. Capitalism on the way up , socialism on the way down.

Goldman Sachs and Morgan Stanley were the last two major investment banks left standing amidst the chaos, have become regulated banks. I can only assume that this transformation paves the way for the Federal Reserve to provide more direct assistance to Goldman Sachs and Morgan Stanley. In a statement issued at 9.30 p.m. local time Sunday the Federal Reserve said it had approved their applications to become bank holding companies, subject to regulation by the Fed.

According to the Financial Times, during the transition period the Fed will make loans to both entities and to the broker-dealer subsidiary of Merrill Lynch against collateral acceptable for posting either by a bank or a securities firm. The Fed will also lend to Goldman, Morgan and Merrill’s London-based broker dealer subsidiaries directly.

The Fed approval is subject to a five-day waiting period for potential antitrust issues.
The move effectively spells the end of the investment banking industry as a separate sector, leaving behind only small boutique securities firms. It means that both Goldman Sachs and Morgan Stanley will be subject to bank capital requirements that will be phased in over a transition period.

Does the Federal Reserve have no standards for approving applications to become bank holding companies? Does the Fed do Safety and Soundness check of Morgan Stanley and Goldman Sachs? Does the Fed check to see if MS and GS are solvent? Does the Fed check character references to see if MS and GS are liars and cheaters? Does the Fed check to see if the firms have showed reckless disregard for other people’s moneys? Does the Fed check to see if MS and GS are bankrupt (Level 3 “assets,cds exposure, etc.)? Does the Fed just rubber stamp a bank application? Does the Fed perform due diligence and scrutinize bank applications by MS and GS?

This should have been done months ago with the other investment banks. Maybe if this was done, then we would not be in the crises we are in now. Let’s hope this is not “to little, to late”. However, only time will tell if the Fed bailout plan, and this action, will prevent our financial system from going over the edge. It is going to be tense for a long period of time.

As always these troubled banking corporations will agree to more stringent regulations. In due course and within a political cycle or two, they will be allowed to self destruct once again and have the taxpayers and consumers pick up the tab. Freedom from consequences … that has become the American way.

Why hasn’t anyone said anything about the fact that Paulson worked for Goldman for 25 years? He is a Wall Street Good Old Boy bailing out his old firm…and buddies. Free markets are dead.

I think Hank Paulson needs a board of directors at Treasury ASAP. One man trying to regulate Wall Street is not going to happen prudently when one weary head wears the crown. Paulson wants to just throw money at the crisis so he does not watch over the bankruptcy of his former institutions. A bankruptcy can be a great way to discover the value of assets, and I wish it had been done. A lot of people would have been hurt and credit would have dried up for the short-term, but finance executives and Americans would have learned one huge lesson. Finance would have gravitiated to foreign institutions as we rebuilt ours, but it would have been worth it as a capitalist society willing and able to manage ourselves in the private market.

Other resources:

TOKYO (Reuters) – Mitsubishi UFJ Financial Group , Japan’s largest bank, said it would announce an investment into U.S. investment bank Morgan Stanley on Monday at 8:30 a.m. EDT. A spokesman for MUFG did not provide further details
Source: moneycentral.msn.com

Federal Reserve changes status of Goldman Sachs and Morgan Stanley to – Chicago Tribune
WASHINGTON (AP) _ The Federal Reserve said Sunday it had granted a request by the country’s last two major investment banks Goldman Sachs and Morgan Stanley to change their status to bank holding companies. The Fed announced that it had
Source: www.chicagotribune.com

Fed to regulate Goldman, Morgan Stanley – Reuters
WASHINGTON (Reuters) – Goldman Sachs and Morgan Stanley gave up their cherished investment banking status in return for cover under the Fed’s wing to survive a financial storm that U.S. authorities aim to tackle with a $700 billion bailout plan. The
Source: www.reuters.com

Goldman, Morgan Stanley to become regulated banks – Financial Times
Goldman Sachs and Morgan Stanley , the last surviving big investment banks on Wall Street, have become regulated banks. In a statement issued at 9.30pm Sunday, the Federal Reserve said it had approved their applications to become bank holding
Source: www.ft.com

Morgan Stanley, Goldman Sachs to become bank holding companies – News.com.au
US investment banks Goldman Sachs and Morgan Stanley will become bank holding companies and will receive new US government credit, the Federal Reserve has announced. THE Federal Reserve has agreed to allow investment banks Goldman Sachs and Morgan
Source: www.news.com.au

Goldman, Morgan Stanley abandon investment banking mod – MSN MoneyCentral
Goldman Sachs Group Inc ( GS ) Stock Quote , Chart , News , Add to Watchlist WASHINGTON (Reuters) – Goldman Sachs and Morgan Stanley sought shelter with the Federal Reserve to survive a financial storm that has destroyed their rivals, effectively
Source: moneycentral.msn.com

Federal Reserve changes status of Goldman Sachs and Morgan Stanley to – Los Angeles Times
WASHINGTON (AP) _ The Federal Reserve said Sunday it had granted a request by the country’s last two major investment banks Goldman Sachs and Morgan Stanley to change their status to bank holding companies. The Fed announced that it had
Source: www.latimes.com

Goldman, Morgan Stanley flee into Fed’s arms – Reuters
WASHINGTON (Reuters) – Goldman Sachs and Morgan Stanley sought shelter with the Federal Reserve to survive a financial storm that destroyed their rivals, effectively killing Wall Street’s investment banking model of the past two decades. The move is
Source: www.reuters.com

Fed to regulate Goldman, Morgan Stanley – Boston Globe
WASHINGTON (Reuters) – Goldman Sachs and Morgan Stanley gave up their cherished investment banking status in return for cover under the Fed’s wing to survive a financial storm that U.S. authorities aim to tackle with a $700 billion bailout plan. The
Source: www.boston.com

Goldman, M.Stanley transform into Fed-regulated banks – Boston Globe
WASHINGTON/PHILADELPHIA (Reuters) – Goldman Sachs and Morgan Stanley were granted approval on Sunday to become bank holding companies regulated by the U.S. Federal Reserve, effectively killing off the investment banking model that has dominated Wall
Source: www.boston.com