Goldman Sachs and Morgan Stanley are now bank holding companies

Now they'll have permanent access to the Fed discount window.  And maybe now Morgan Stanley won't feel so compelled to rush into a shotgun wedding with Wachovia.

``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,'' the central bank said in an e-mailed press release in Washington.

Fed officials also increased the two securities firms' ability to take out direct loans from the central bank, granting access against a wider pool of collateral. That step was made ``to provide increased liquidity support to these firms as they transition to managing their funding within a bank holding company structure,'' the Fed said.

Fed Allows Goldman, Morgan Stanley to Become Banks - Bloomberg

The press releases from the Fed, Goldman and Morgan Stanley are below:

Press Release

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.

Goldman's Press Release:

Goldman Sachs To Become The Fourth Largest Bank Holding Company

September 21, 2008

New York, September 21, 2008 -- The Goldman Sachs Group, Inc. (NYSE: GS) today announced that it will become the fourth largest Bank Holding Company and will be regulated by the Federal Reserve.

In recent weeks, particularly in view of market developments, Goldman Sachs has discussed with the Federal Reserve our intention to be 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.

Since the spring of this year, the Federal Reserve has been reviewing our liquidity and funding profile, capital adequacy and overall risk management framework. We are pleased that the Federal Reserve recognizes the strength and health of our liquidity and funding and the overall quality of our risk management. We have maintained our Tier 1 capital levels well above the Federal Reserve’s “well-capitalized” threshold of 6 percent since these ratios were first calculated in 2004. For the past several quarters, in light of the difficult market environment, we have been reducing our risk exposures and increasing our capitalization. Our Tier 1 capital ratio at the end of the third quarter was 11.6 percent.

“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,” said Lloyd C. Blankfein, Chairman and CEO of Goldman Sachs. “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.”

Goldman Sachs already has two active deposit taking institutions – Goldman Sachs Bank USA and Goldman Sachs Bank Europe PLC – which, together, hold more than $20 billion in customer deposits. We are moving assets from a number of strategic businesses, including our lending businesses, into GS Bank USA. With over $150 billion in assets, GS Bank USA will be one of the ten largest banks in the United States. 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.

Goldman Sachs is a leading global investment banking, securities and investment management firm that provides a wide range of services worldwide to a substantial and diversified client base that includes corporations, financial institutions, governments and high net worth individuals. Founded in 1869, it is one of the oldest and largest investment banking firms. The firm is headquartered in New York and maintains offices in London, Frankfurt, Tokyo, Hong Kong and other major financial centers around the world.

Morgan Stanley's press release:

Morgan Stanley Granted Federal Bank Holding Company Status By U.S. Federal Reserve Board of Governors

Provides Ongoing and Expanded Access to Federal Reserve Window and Other New Funding Opportunities

Sep 21 2008 | New York      

Morgan Stanley today announced that its application to become a bank holding company was approved by the U.S. Federal Reserve Board of Governors.  Morgan Stanley has elected to be deemed a financial holding company under the Bank Holding Company Act.

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 Firm will pursue initiatives to expand the retail banking services it offers its retail clients and build a stable base of core deposits.  Morgan Stanley has more than 3 million retail accounts and had $36 billion in bank deposits as of August 31, 2008.

The Firm’s status as a Federal Bank Holding Company also provides Morgan Stanley ongoing access to the Federal Reserve Bank Discount Window and expanded opportunities for funding.

John J. Mack, Chairman and Chief Executive Officer, 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.”

As part of this process, Morgan Stanley will convert its Utah industrial bank to a national bank and will become subject to supervision of the Federal Reserve.  The Firm also will be regulated by the Federal Deposit Insurance Corporation (FDIC), which will continue to insure deposits at Morgan Stanley Bank to the maximum extent allowed by the FDIC.

The Firm does not expect significant adverse tax or accounting effects from this new status, nor does the Firm expect there to be limitations on its activities that would have a material impact on Morgan Stanley’s overall business.

Morgan Stanley (NYSE: MS) is a leading global financial services firm providing a wide range of investment banking, securities, investment management and wealth management services.  The Firm's employees serve clients worldwide including corporations, governments, institutions and individuals from more than 600 offices in 35 countries.  For further information about Morgan Stanley, please visit www.morganstanley.com.

Media Relations Contact: Jeanmarie McFadden, 212-762-6901