At 9:30PM Sunday evening, the Federal Reserve issued a two-paragraph statement approving the application of Goldman and Morgan Stanley to become bank holding companies. This technical regulatory change, slipped under the radar while we were all catching our breath from a day of pushing Democratic leaders not to roll over on Paulson's budget plan and preoccupied with the busy week ahead, may prove to be the biggest story of them all.
The Wall Street Journal said of the move that "Wall Street as it has long been known will cease to exist" (WSJ Online Edition, 9/22/08), and Andrew Ross Sorkin wrote on the front page of the Times that the Fed's decision would subject the two entities to "far greater regulation" and end the tenure of the SEC and its Chairman (McCain villain) Christopher Cox as the sole authority with jurisdiction over these entities.
But the real story here may be not that this story shows that (former-Goldman CEO) Paulson is clamping down on Wall Street, but what it presages for the future.
Now that Goldman and Morgan Stanley are effectively on the same playing field as JPMC, Citi and other large bank holding companies that own investment banks, the next step will be to reduce the leverage reflected on these entities balance sheets to make them more in line with the ratios of other bank holding companies. While there is some disagreement about the proper way to do an apples-to-apples comparison of these leverage ratios, what we are likely talking about here is a significant portion of the bailout being used to purchase overvalued assets on the Goldman and Morgan Stanley balance sheets.
Is it any wonder that on Sunday Paulson also sought to expand upon his original proposal to include non-real estate assets in what the bailout funds would be used for?