In the two weeks of chaos at Wall Street that brought major financial markets around the globe to their knees, the last two investment banks left standing in the US, Morgan Stanley and Goldman Sachs have decided to become bank holding companies, which would bring their activities under the regulation of the US Federal Reserve.

The surprise announcement by the Federal Reserve has brought the curtains down on the last two independent Wall Street investment banks left standing after the financial storm that felled Merrill Lynch, Lehman Brothers and insurance giant AIG within a week in the last few days.

The difference in definition has two main implications. The first is that it allows Goldman Sachs and Morgan Stanley the right to access emergency funds from the Federal Reserve's lending facility on the same terms as retail banks, and the second is that it comes under the scrutiny of America's central bank, which demands more sober debt levels.  

The move could also end the fat salaries and bonuses that lent investment bankers the persona of high and mighty deal makers on Wall Street.

They will also become direct competitors to traditional banks like Citigroup, JPMorgan Chase and Bank of America.

The Federal Reserve released a statement, in which it said that its board had approved the applications of Goldman Sachs and Morgan Stanley to become bank holding companies and authorised credit to the two firms "against all types of collateral" that commercial banks avail of to get loans from the central bank.

The banking industry in the US had been bifurcated into commercial and investment banking during the Great Depression in 1930 in order to restore confidence among the people.

Goldman Sachs has two active deposit-taking subsidiaries namely Goldman Sachs Bank USA and Goldman Sachs Bank Europe PLC, which has combined deposits of around $20 billion. Both these will be combined into one entity and called 'GS Bank USA'.

The invest banker said it woulde become the fourth-largest US bank by moving assets from a number of businesses into GS Bank USA, with assets over $150 billion.

Lloyd C Blankfein, Goldman's chief executive said, "We believe that Goldman Sachs, under Federal Reserve supervision, will be regarded as an even more secure institution with an exceptionally clean balance sheet and a greater diversity of funding sources."

Morgan Stanley, with $36 billion in bank deposits, will transform its Utah industrial bank into a deposit-taking national bank and rename it 'Morgan Stanley Bank'.

Morgan Stanley's chairman and chief executive, John J. Mack, issued a statement saying, ''This new bank holding structure will ensure that Morgan Stanley is in the strongest possible position – with the stability and flexibility to seize opportunities in the rapidly changing financial marketplace. It also offers the marketplace certainty about the strength of our financial position and our access to funding.''

According to media reports, Morgan Stanley is in merger talks with Wachovia, one of the largest US banks with China Investment Corp taking a stake in the company as part of a deal. (See: Morgan Stanley, WaMu, seek mergers)  Since the beginning of the credit squeeze Morgan Stanley has lost $15.7 billion in writedowns, other types of loans and on mortgage-related securities whereas Goldman's total loss is nearly $4.9 billion.

Although its revenue from sales and trading and investment banking have taken a beating this year, both have recorded profits and avoided showing any loss in the quarters.

Morgan Stanley and Goldman Sachs had come under extreme stress to find merger partners by the US Federal Reserve, which did not want to see some more spectacular collapses at Wall Street, which saw Lehman Brothers declaring bankruptcy, Merrill Lynch being bought for $50 billion by Bank of America, Bear Stearns being acquired by JPMorgan Chase in March, the unparalleled government rescue of giant insurer American International Group and the takeover of mortgage-finance giants Fannie Mae and Freddie Mac.

The move also came as the US Congress is now considering an unprecedented $700 billion bailout plan for the troubled financial industry reeling under the burden of bad mortgage loans.

Goldman and Morgan Stanley will now be allowed to take deposits, buy retail banks with much more ease and give the two firms easier access to credit which can help them overcome the financial crisis.

The Federal Reserve will keep a close eye on the two remaining troubled banks - Washington Mutual and Wachovia who have been desperately trying to prop up their accounting books as investors have lost their confidence and both are finding it extremely difficult to find credit.