Goldman Sachs (GS) and Morgan Stanley (MS) today give up their vaunted status as investment banks, no longer being the top dogs of the financial world. In this ancient industry, there is now no last man standing.

While the move will give them access to Federal Reserve lending facilities which will probably be enough to shore up their liquidity to a level that will allow them to survive, it may have been better for them to die with their boots on. At least then they could have avoided the process of becoming eunuchs..

Goldman and Morgan Stanley, as banks, will now have extraordinary limits placed on the amount of money that they can borrow, at least compared with the old days. According to The New York Times, the change will "make them more financially sound but will also significantly limit their profits."

Now that the two companies take retail deposits, the foundation of their capital bases will improve giving them additional capital reserves in hard times.

This action is another example of the extraordinary emergency powers seized by the Fed and the Treasury. This increase in federal power over the banking industry is currently benign, but it is already arbitrary.  No one knows knows how this will turn out.

As banks, Goldman and Morgan Stanley will have much greater regulation. Their ability to make money trading and selling exotic financial instruments will be curtailed. The federal government is building a safety net while at the same time sanitizing the system. The Fed could easily have opened its "window" wider to the last two remaining investment banks. But, it now wields the power to make rules which in times past might have been subject to great restrictions from Congress or even the courts.

Instead of giving a modest lifeline to Goldman and Morgan Stanley and allowing them to risk an uncertain and risky future, the new colossi regulating the financial system decided to defang the investment banking world in the name of saving it.

The jailers have decided that some people are too dangerous to be on the streets.

Douglas A. McIntyre

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