Why Wall Street Is Forever Changed

Goldman Sachs and Morgan Stanley, two of the most successful investment banks on Wall Street, are now becoming regular commercial banks. This means they will be regulated by the Federal Reserve and give up the anonymity which allowed them to take greater risks with their capital. This risk-taking, which made them highly profitable, also led to the current banking crisis.

The two banks have both taken write-downs in the billions in subprime mortgage-backed securities. Morgan Stanley's losses were so great they sought financing from two Asian banks in return for part ownership in the company: $8.4 billion from Mitsubishi Financial Group for 20% of the company and $5 billion from the China Investment Corporation for a 10% stake.

The two investment banks took this step to avoid the fate of AIG and Bear Stearns.

What It Means to You

Expect to see Goldman Sachs and Morgan Stanley banks near you over the next few years. More importantly, this change means that banks now realize they are safer with regulatory oversight than without. In return, they are giving up some ability to increase profits through leverage. This makes for a less volatile, though slower growing, economy. Overall, it should help mitigate the boom-and-bust cycle we are now suffering through...at least just a little.

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