The two remaining large U.S. independent investment banks, Morgan Stanley and Goldman Sachs, announced that they are to abandon their investment bank status to become bank holding companies regulated by the U.S. Federal Reserve Board.

Goldman said that “in view of market developments”, it talked with the Fed about being regulated as a bank holding company. “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. 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.”

The firm already has two active deposit taking institutions – Goldman Sachs Bank USA and Goldman Sachs Bank Europe PLC – which, together, hold more than US$20 billion in customer deposits. It is moving assets from a number of other businesses, including its lending businesses, into GS Bank USA.

With more than US$150 billion in assets, GS Bank USA will be one of
the 10 largest banks in the U.S., it said: “While these assets are fully funded for term, they also are available to be funded by the Federal Reserve. We intend to grow our deposit base through acquisitions and organically.”

Added Goldman Sachs chairman and CEO, Lloyd Blankfein: “When Goldman Sachs was a private partnership, we made the decision to become a public company, recognizing the need for permanent capital to meet the demands of scale. While accelerated by market sentiment, our decision to be regulated by the Federal Reserve is based on the recognition that such regulation provides its members with full prudential supervision and access to permanent liquidity and funding. “We believe that 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 sources.”

Morgan Stanley also announced that its application to become a bank
holding company was approved by the Fed. “Morgan Stanley sought this new status from the Federal Reserve to provide the firm maximum flexibility and stability to pursue new business opportunities as the financial
marketplace undergoes rapid and profound changes,” the bank explained. “The firm will pursue initiatives to expand the retail banking services it offers its retail clients and build a stable base of core deposits.”It already has more than three million retail accounts and had $36 billion in bank deposits.

John Mack, chairman and CEO of Morgan Stanley, said: “This new bank holding structure will ensure that Morgan Stanley is in the strongest possible position – with the stability and flexibility to seize opportunities in the rapidly changing financial marketplace. It also offers the marketplace certainty about the strength of our financial position and our access to funding. As we evolve our business model and move quickly to seize these new opportunities, we remain intensely focused on continuing to provide world-class service and advice to our clients and deliver long-term value to our shareholders.”

The Fed said it would provide increased liquidity support to the two firms as they transition to managing their funding within a bank holding company structure, the Fed 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 its primary credit facility for depository institutions or at the existing Primary Dealer Credit Facility. The Fed has also made these collateral arrangements available to the broker-dealer subsidiary of Merrill Lynch.

In addition, it also authorized the New York Fed 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.

Morgan Stanley then announced soon thereafter that it has entered into a letter of intent to pursue a strategic alliance with Japan’s Mitsubishi UFJ Financial Group, Inc.

The letter of intent would see MFUG take a stake in Morgan Stanley that would eventually reach 20% of its equity on a fully diluted basis. Upon the closing, a representative of MUFG will join the Morgan Stanley board.

Morgan Stanley said that transaction would strengthen the firm’s capital position, and give each firm a valuable strategic partner. The letter of intent is non-binding and subject to definitive documentation and due diligence. The closing of the transaction would be subject to regulatory approvals and other conditions.

@page_break@“This strategic alliance with Mitsubishi UFJ can put Morgan Stanley in an even stronger position as we look to realize the opportunities we see in the rapidly changing financial marketplace,” said John Mack, Morgan Stanley’s chairman and CEO. “As one of the largest commercial banks in the world, Mitsubishi UFJ would be a valuable partner as we transition to a bank holding company and build our bank services and deposit base.

“This alliance also would build on Morgan Stanley’s deep ties and market leadership in Japan and throughout Asia, and help us to continue growing our business in this critically important region,” he added.