While most of us were logging in couch time and watching the Emmys on Sunday night, the Federal Reserve was hard at work creating a new measure that converted investment banks Morgan Stanley and Goldman Sachs into traditional bank holding companies. The two firms were the last standing independent investment banks on Wall Street, and the conversion to bank holding companies truly marks the end of an era.
As bank holding companies, the two companies will be regulated by the Fed and held to much stricter capital requirements than in their previous independent lives. In order to preserve and increase liquidity, the banks will now rely on deposits for capital instead of short-term funding, and the reclassification will allow the banks to build up banking activities on top of the existing investment focus.
MS may not need access to that Fed discount window anymore though since as of this morning (Monday), it entered into a strategic alliance with Mitsubishi UFJ. The agreement allows MS to sell up to 20% of its diluted equity to MUFJ. This also gives MS access to MUFJ's $1.1 trillion+ in retail deposits. Globally, MUFJ is second only to HSBC in terms of its size of retail deposits so now when Mack says "we are well capitalized," you can rest assured that he really means it.
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