The Federal Reserve has granted the applications of Goldman Sachs and Morgan Stanley to change their status to become bank holding companies in order to stay in business, AP Economic Writer Martin Crutsinger reported this morning. The change in status will allow Goldman and Morgan to take deposits thereby bolstering their resources. The article hailed it as “the end of an era.” The primary regulator of Goldman and Morgan was formerly the Securities and Exchange Commission. The primary regulator of the new bank holding companies will be the Federal Reserve, according to the article. The shares of Goldman and Morgan had come under pressure in the wake of the Lehman Brothers bankruptcy and the “forced sale” of Merrill Lynch to Bank of America.
In order to put things in perspective, look back to 1929 and the ensuing Great Depression. On March 6, 1933, President Roosevelt declared a week-long “bank holiday” that resulted in Congressional reform of the national banking system through passage of the National Bank Act of 1933. That law prohibited banks from engaging in or affiliating with firms doing securities underwriting and dealing. This came after well-publicized hearings that spotlighted abuses by well-known bankers and brokers, who came to be known as “banksters.” It became the prevailing view that abuses by such banksters contributed to the market crash, numerous bank failures, and the Great Depression. The twin evils that the National Bank Act of 1933 was designed to address were preventing banks from imprudently speculating in securities with depositors’ money, and avoiding the risk that a financial conflagration could quickly spread and threaten the entire financial system.
Fast forward to today. A financial conflagration has spread and engulfed the entire financial system. Congress is acting in great haste to try to put out the fires. The separation of traditional banking from the securities industry that was done to prevent the abuses that led to the Great Depression is now completely undone. After emergency weekend meetings where the Treasury Department, the Fed, and Congressional staff hurried to iron out the details of the government’s plan to buy $700 billion in unvalued mortgage debt, Senate Banking Committee Chairman Chris Dodd said, it’s equally important to act responsibly as it is to move quickly on the legislation needed to stabilize the country’s troubled financial markets, according to the article. It will be interesting to see how Congress tries to deal with the abuses that occurred “only yesterday” when banks and broker-dealers were combined.
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