Morgan Stanley and Goldman Sachs in Radical Shift to Become Bank Holding Companies

The NY Times is reporting that both Morgan Stanley and Goldman Sachs are planning to change their corporate structure and become bank holding companies.

"Goldman Sachs and Morgan Stanley, the last two independent investment banks on Wall Street, will transform themselves into bank holding companies subject to far greater regulation, the Federal Reserve said Sunday night, a move that fundamentally reshapes an era of high finance that defined the modern Gilded Age."

What does this decision mean?

1. Greater regulation as the banks will now be subject to same regulatory scrutiny of commercial banks.

2. Less profit as the firms need to significantly reduce their leverage. The NY Times reports that Goldman Sachs has $1 of capital for every $22 of assets; Morgan Stanley has $1 for every $30. By contrast, Bank of America’s has less than $11 for every $1 of capital.

3. Greater access to Fed funds. While investment banks have had some emergency access to the Fed's window, they now have a much broader array of funds at their disposal.

4. Greater access to consumer deposits. Both Goldman and Morgan Stanley are, to a large degree, turning to consumer deposits to help their funding needs. As I wrote before, the investment banks realize that consumer deposits are the cheapest, most reliable source of funds. It's one of the reasons the large commercial banks have not felt the same impact from the credit crunch. Look for increased competition for your cash.