Goldman Sachs or Morgan Stanley could continue to function as an independent investment banks — something competitors including Bear Stearns, Lehman

Goldman Sachs and Morgan Stanley have established their gilded reputations advising companies how to remake themselves, often in hostile environments.Only a week ago, both were insisting that their fundamental strategies were fine. As a punishing market took down their competitors one by one, executives of the leading investment houses were resisting calls to become more like banks. Doing so, they warned, might make them and the entire American financial system less nimble, less creative — and less willing to take the big risks that reaped big rewards.Now, the surprising weekend metamorphosis of both into regulated bank holding companies capable of acquiring other banks has transformed Wall Street into an arena of greater stability, less complexity — and smaller profits, at least compared with the eye-popping standards that had created a golden era of $50 million bonuses for top traders and bankers.“I think it means a tamer Wall Street and profits that are smaller but probably less volatile. I do think this probably curbs their entrepreneurial initiative,” Samuel L. Hayes, emeritus professor of investment banking at Harvard, told The Times. “But that was going to happen anyway.”The announcements also leave the industry looking similar to its framework in the 1930s, before the Glass-Steagall Act separated investment banking from commercial banking. Morgan Stanley moved quickly into the new era on Monday, announcing plans to sell up to a 20 percent stake in itself to the Mitsubishi UFJ Financial Group, Japan’s largest commercial bank, for about $8 billion.Mitsubishi has $1.1 trillion in bank deposits, which will help bolster Morgan’s stability of financing. Morgan Stanley had $36 billion in bank deposits as of Aug. 31 and also said it planned to add more by offering new retail banking services to clients and by making acquisitions.
Goldman Sachs, whose former chairman, Henry M. Paulson Jr., has in his present role of Treasury secretary commandeered the current rescue of America’s troubled financial system, is also expected to increase its deposit base.Private equity money might also come to the rescue, after the Federal Reserve on Monday announced changes to rules that would allow these firms and other minority investors to own up to 33 percent of a bank’s equity up from 25 percent, as long as their voting block was less than 15 percent of shares. And these investors can for the first time openly influence decisions at the banks in which they invest.Investors reacted more positively to Morgan Stanley’s shift on Monday, pushing the bank’s shares down 12 cents, or 0.4 percent, to $27.09 after being in free fall last week. Shares of Goldman fell $9.02, or 7 percent, to $120.78, a move analysts attributed to the bank not announcing any new capital infusion.Lucas Van Praag, a spokesman for Goldman Sachs, told The Times that the bank had no immediate plans to raise more capital, although it could do so to finance the acquisition of assets it viewed as attractive.
Both Morgan Stanley and Goldman Sachs already took customer deposits. Goldman, which will become the fourth-largest bank holding company, has $20 billion in deposits spread between the United States and Europe. The bank plans to move assets from other businesses, including its current lending business, giving it $150 billion in deposits. It also plans to widen its business through acquisitions and by attracting more high net-worth investing clients.Both banks may have to shed some assets to come into compliance with the rules that govern bank holding companies. For instance, they may have to sell commodity production facilities like power plants that they have owned in the past. But they will have up to five years to dispose of the assets and may be able to keep them in private equity subsidiaries.If Goldman Sachs and Morgan Stanley were voracious in the world of investment banking, their focus on commercial banking could introduce new competition for existing commercial banks like Citigroup, JPMorgan Chase and Bank of America, as well as smaller regional banks who will have to contend with two new giants on their doorstep.The new face of investment banking also threatens to eat away at the industry’s appeal among workers. The record bonuses of recent years at Wall Street firms look to be a thing of the past as firms like Goldman and Morgan Stanley lower their leverage and ability to produce stunning profits in areas like proprietary trading. slim bonuses this year, the value of workers’ savings in company stocks has plummeted at nearly every company on Wall Street. Commercial bank stocks do not tend to soar upward as fast as investment banking stocks and workers at the fallen investment banks are now worried their new parent companies’ structures will slow the rise of their stocks.
Analysts said the real test for both firms would come if markets improved and opportunities to pump up profits returned.“There is no way to argue that they are going to be as profitable as they were before this,” Meredith Whitney, an analyst at CIBC Oppenheimer, told The Times. “There is a tremendous amount of regulatory scrutiny, micromanaging and red tape, and rightly so, that is part of the process in relation to taking in retail deposits. These guys will have a full-time highly involved chaperone in all of their activities.”

The final decisions were essentially forced over the weekend as investors grew increasingly skeptical that either Goldman Sachs or Morgan Stanley could continue to function as an independent investment banks — something competitors including Bear Stearns, Lehman Brothers and Merrill Lynch could not achieve. Hedge funds also started moving balances away from both banks, a shift that might also have spurred the change in status, according to analysts.According to Mr. Hayes, after resisting change, Goldman Sachs and Morgan Stanley realized they would ultimately be subject to greater regulatory oversight no matter what they did. “Goldman and Morgan went to the Fed and said ‘we want to be regulated by you?’ ” said Richard Portes, a professor of economics at the London Business School and president of the Center for Economic Policy Research. “Give me a break. They knew they’d have to accept increased regulation and lower levels of leverage. Given that, why not have the security that goes with it?”