Sep 22 2008
M. Stanley, G. Sach gives up Investment bank status
If you considered tough times affecting the wall street were abating well it is time to think again. In a move which has come as a surprise, Morgan Stanley and Goldman Sach will now lose their coveted Investment bank status and will henceforth function as traditional banking companies. Their functions will now be regulated by the US Federal Reserve. I see this move coming with its own set of benefits and drawbacks. While on one hand it will enable these institutions to start accepting deposits and will provide them with an easy access to the financing sector. It will also provide them the opportunity to buy other retail banks if the desire. The Fed has authorized credit to both the mentioned firms against all types of collateral that any other commercial bank is permitted to consider as acceptable to take loan from the central bank.
But this status of being a traditional bank will now subject them to tighter banking regulations by the Feds which also include tougher capital requirements. By being under the umbrella of Investment banks these institutions were free from these regulations earlier. Like every other spectator witnessing this news I too fear that these restrictions and rules would result in curbing the ability of these companies to leverage up their propriety trading activities and other such related activities.
This would in turn hamper their huge profit making chances. I would suggest that these steps taken by the US Government should be taken in positive spirit as they go on to show the gravity of seriousness that the US government is granting to the financial crisis and by means of these short term risks they aim to provide some systemic relief to the distraught financial market in the US. As a part of this new set up, the Federal Reserve will take over as being the primary regulator of the parent companies.