On 21st September 2008, at the height of the credit crisis, both Goldman Sachs and Morgan Stanley announced that after discussions with the US Fed, that they were to become regulated as bank holding companies.
The move effectively returned Wall Street to the way it was structured before Congress passed a law during the Great Depression separating investment banking from commercial banking, known as the Glass-Steagall Act.
As bank holding companies, they become subject to far greater regulatory scrutiny. In effect they become more like commercial banks, with more disclosure, higher capital reserves and less risk-taking.
The upside for this increased regulation, was that as bank holding companies, they were able to take deposits from the general public, plus they could also access the Fed lending facilities – and having seen Lehman and Bear Stearns go under, was a lifeline that all banks wanted to grab.
Roll forward to October 2011, and details are emerging for the Volcker Rules which will prohibit banks from the majority of their proprietary trading – although moot point as to where positioning as a result of market making, become prop trading by the back door.
So, it’s interesting to see a number of analysts suggesting that Goldman and Morgan Stanley may drop their bank holding company status, in order to be able to retain their proprietary trading operations.