Goldman Sachs and Morgan Stanley, which became bank holding companies in September 2008 to gain government protection and access to the Fed's discount window, may now shed their bank status if the 'Volcker Rule' preventing banks from proprietary trading goes through, according to an article in Saturday's New York Times."President Obama wants to limit the scope of risk-taking by barring banks with federally insured deposits from trading securities for their own accounts and from owning hedge funds and private equity funds," the article noted. "The plan, policy makers said on Friday, would effectively require bank holding companies - which Goldman and Morgan became at the height of the financial crisis - to divest themselves of these lucrative operations. But Treasury Department officials are also seeking to give banks that do not like the proposed rules the option of dropping their status as holding companies to keep their trading and other investment businesses."
Goldman would be the biggest beneficiary of such a move because it makes huge profits from proprietary trading and runs many private equity and hedge funds, the article noted.
It would be less attractive to Morgan Stanley, which has raised deposits and reduced trading operations since the crisis.
The article quotes Simon Johnson, a former chief economist at the International Monetary Fund, as suggesting that these two firms are so large and interconnected that even if they broke free of bank status, their collapse would imperil the global financial system. "You can call them an investment bank, a hedge fund, or a banana, but they are still too big to fail," Mr. Johnson said.