US STOCKS lost ground again yesterday as Goldman Sachs and Morgan Stanley, the pre-eminent US investment banks, succumbed to the turmoil in the financial system and agreed to transform themselves into bank holding companies.
The change in their status, seen as a sign that the financial crisis might be deeper than previously feared, marks the end of an era in which independent broker-dealers dominated the financial world from Wall Street. The two institutions will face new capital requirements as a result of the change.
The development, which means Goldman Sachs and Morgan Stanley will be able to take deposits from consumers or acquire deposit-takers, is an implicit acknowledgement that their business model is no longer viable following the convulsions that brought Lehman Brothers to bankruptcy and led to firesales as Bear Stearns and Merrill Lynch.
While Goldman Sachs in particular largely avoided many of the bad investments that bore down on its rivals, the company's dependence on the capital markets for funds would leave it badly exposed in the event of a downturn in its business.
Sanctioned overnight by the US Federal Reserve, the change in status was swiftly followed by Morgan Stanley's disclosure that it was selling a stake as large as 20 per cent for $8.4 billion (€5.67 billion) to Mitsubishi UFJ Financial Group, Japan's largest bank.
Agreement on the change in status and on the Mitsubishi UFJ transaction, which will strengthen Morgan Stanley's capital position, signals that the investment bank is less likely to conclude a deal with US bank Wachovia, with which it was in advanced takeover talks last week.
Having signalled late on Sunday that a five-day waiting period was required to facilitate regulatory approval of the change in status, the Fed yesterday rushed through approval of the change.
"Based on consultation with the department of justice regarding the applications of Goldman Sachs and Morgan Stanley to become bank holding companies, the Federal Reserve board announced . . . that the transactions may be consummated immediately without the application of the five-day antitrust waiting period," the central bank said in statement.
"We understand that the market views oversight by the Federal Reserve and the ability to source insured bank deposits as providing a greater degree of safety and soundness," said Goldman Sachs.
"We view regulation by the Federal Reserve board as appropriate and in the best interests of protecting and growing our franchise across our diverse range of businesses."
As the dollar came under pressure in light of the US government's plan to provide a $700 billion bailout for banks holding bad mortgage assets, US markets were dragged downward due to speculation that the plan will not prevent recession.
The Standard Poor's 500 Index was down by as much as 2.7 per cent, wiping out about a third of its rally over the previous two days, the biggest since 1987.
Sovereign Bancorp, Marshall Ilsley and Washington Mutual lost more than 20 per cent on speculation the bank bailout will lower the value of mortgage loans they hold.
