Fed extends credit to last independent Wall Street banks

AFP , WASHINGTON

Tue, Sep 23, 2008 - Page 1

The US Federal Reserve agreed late on Sunday to allow investment banks Goldman Sachs and Morgan Stanley to become bank holding companies, giving them easier access to credit to help them survive the financial crisis.

The announcement completes an overhaul of the structure of the banking industry, which had been broken up in the 1930s into commercial and investment banks.

Goldman and Morgan Stanley had been the last two independent Wall Street banks, but had been under pressure to find merger partners.

The move came as the US Congress considered an unprecedented US$700 billion rescue plan designed to bail out the troubled financial industry. The Fed’s decision places the banks under supervision by bank regulators and opens a wider range of credit to them.

In a statement, the Federal Reserve said its board had approved the applications of Goldman Sachs and Morgan Stanley to become bank holding companies and authorized credit to the two firms “against all types of collateral” that commercial banks can use to get central bank loans.

The Fed also made these collateral arrangements available to the broker-dealer subsidiary of investment firm Merrill Lynch, which was bought a week earlier by Bank of America.

The US$700 billion bailout proposal, now in the hands of Congress, comes on the heels of the unprecedented government rescue of giant insurer American International Group and the seizure of mortgage-finance giants Fannie Mae and Freddie Mac.

Goldman and Morgan Stanley have had access to Fed credit as a “primary dealer” of securities under a temporary program announced by the Fed after the collapse earlier this year of Bear Stearns.

But the opening of this line of credit to non-banks had raised concerns because the institutions had not been subject to the same regulations as banks.

Goldman said in a statement it would become the fourth-largest US bank holding company “and will be regulated by the Federal Reserve.”

“We view regulation by the Federal Reserve Board as appropriate and in the best interests of protecting and growing our franchise,” the company said.

Goldman Sachs already has two active deposit-taking institutions, Goldman Sachs Bank USA and Goldman Sachs Bank Europe PLC, with a total of some US$20 billion in deposits.

Morgan Stanley, which has some US$36 billion in bank deposits, said it sought the 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.”

Some reports said Morgan Stanley was in merger talks with Wachovia, one of the largest US banks, and that China Investment Corp could take a stake in the company as part of a deal.

Meanwhile, US Treasury Secretary Henry Paulson urged Congress to adopt his financial rescue plan without delay.

“We need this to be clean and quick and we need to get it in place,” Paulson said in an ABC television interview on Sunday.

The treasury secretary also said the US was pressing other countries to forge bailouts for their financial institutions similar to the rescue plan.

“I’m also going to be pressing our colleagues around the world to design similar programs for their banks and institutions when they are appropriate,” Paulson said on Fox News on Sunday.

But while voicing general support for the bailout plan, leaders of the Democratic-controlled Congress said there should be some help for ordinary Americans hammered by the worst housing slump in decades.

Senator Charles Schumer of New York said the rescue was needed but had to be carried out in an open, transparent way and provide some relief for homeowners as well.

“We have to do something about the mortgage crisis, not just foreclosures but the price of housing, which is affecting everyone on Main Street,” the influential Democrat told Fox television.

Senate Banking Committee Chairman Chris Dodd agreed that a “clean and simple” bill was necessary, but also called for changes to the proposal to ensure accountability and assistance for homeowners.

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