This is an interesting twist. Obviously, it means that Morgan Stanley will be subject to more stringent regulation, but I wonder what it fundamentally means for the business model. This will be really interesting to following over the next days/weeks/months.

Goldman Sachs, Morgan Stanley To Be Bank Holding Companies – WSJ.com

The Federal Reserve said it had approved the transformation of both Morgan Stanley and Goldman Sachs from investment banks to traditional bank holding companies, a step that would place the last two Wall Street titans under the close supervision of national bank regulators, subjecting them to new capital requirements and additional oversight.

The Fed said it would also extend additional lending to the broker-dealers of the two firms, in addition to Merrill Lynch’s, as they make the transition.

The steps effectively mark the end of Wall Street as it has been known for decades, and formalizes a quid-pro-quo that regulators have warned about in the months after Bear Stearns’s near collapse — in return for access to the Fed’s emergency lending facilities, the firms would need to subject themselves to more oversight. The step could have far reaching effects on their profitability and their business models.

More, from CNN:

Fed changes status for Goldman and Morgan – Sep. 21, 2008

WASHINGTON (AP) — The Federal Reserve said Sunday it had granted a request by the country’s last two major investment banks – Goldman Sachs and Morgan Stanley – to change their status to bank holding companies.

The Fed announced that it had approved the request of the two investment banks. The change in status will allow them to create commercial banks that will be able to take deposits, bolstering the resources of both institutions.

The change continued the biggest restructuring on Wall Street since the Great Depression.

And the Fed Statement:

Fed Statement on Goldman, Morgan Stanley

The following is the Federal Reserve’s statement on the change in status of Goldman Sachs and Morgan Stanley:

The Federal Reserve Board on Sunday approved, pending a statutory five-day antitrust waiting period, the applications of Goldman Sachs and Morgan Stanley to become bank holding companies.

To provide increased liquidity support to these firms as they transition to managing their funding within a bank holding company structure, the Federal Reserve Board authorized the Federal Reserve Bank of New York to extend credit to the U.S. broker-dealer subsidiaries of Goldman Sachs and Morgan Stanley against all types of collateral that may be pledged at the Federal Reserve’s primary credit facility for depository institutions or at the existing Primary Dealer Credit Facility (PDCF); the Federal Reserve has also made these collateral arrangements available to the broker-dealer subsidiary of Merrill Lynch. In addition, the Board also authorized the Federal Reserve Bank of New York to extend credit to the London-based broker-dealer subsidiaries of Goldman Sachs, Morgan Stanley, and Merrill Lynch against collateral that would be eligible to be pledged at the PDCF.