WASHINGTON — As the last of the major investment banks become bank holding companies, Goldman Sachs Group Inc. and Morgan Stanley will need more capital, face tougher oversight, and will be forced to shed certain businesses.

In exchange, they will get a deposit base to fund their business and easier access to the Federal Reserve Board's discount window.

Each will convert an industrial loan company, and each has big plans for the resulting bank.

Goldman Sachs Bank USA is the fifth-largest ILC, with $25 billion in assets, and its parent plans to convert it into a state-chartered bank in Utah to purchase brokered and retail deposits from troubled institutions, either directly or from Federal Deposit Insurance Corp. receiverships.

A spokesman for the firm said it also plans to fold $150 billion of assets already held by Goldman into the bank charter.

Morgan Stanley Bank in Salt Lake City is the nation's second-largest ILC, with $39 billion of assets. It will be converted into a national bank, and the firm may use its retail wealth management locations as commercial banking branches.

A spokeswoman for Morgan Stanley said a retail banking network was part of its plans, though she was vague about what that network would look like.

"We are planning to pursue initiatives to expand the retail banking services that we currently offer to our retail clients," the spokeswoman said. "Right now we have more than 3 million retail accounts. We're planning to build that out and build our base of deposits."

As they come under closer scrutiny from the Fed, both firms must drastically reduce their equity-to-asset ratios, which are currently about 30% at Morgan Stanley and 22% at Goldman Sachs.

But the Treasury Department's sweeping plan to buy up to $700 billion of illiquid mortgage assets should help with the deleveraging of their balance sheets, said Gil Schwartz, a former Fed lawyer who now works in private practice.

"You've got to sell assets so you could sell to the $700 billion fund," he said.

Lucas Van Praag, a spokesman for Goldman, had a different take on the question.

"We think that the real issue is risk, not leverage," he said. "If we sold $10 billion of subprime [assets], we would reduce our risk dramatically, but we wouldn't move the needle on leverage at all. If we sold $100 billion worth of fully funded Treasuries, we'd reduce our leverage dramatically, but we would hardly move the needle on risk. We think it's much more appropriate to look at risk-adjusted leverage, rather than a simple equity-to-assets ratio."

Goldman and Morgan Stanley also will need to perform a self-assessment in the coming months to determine what assets must be divested. Federal law limits bank holding companies from commercial activities common for brokerages.

"Investment banks are generally involved in a lot of activities that aren't financial, like real estate development," Mr. Schwartz said. "The bank holding company gives them time to wind it down, but there are probably a lot of activities that aren't financial."

Ernest Patrikis, the former general counsel at the Federal Reserve Bank of New York, said divestment would not be too difficult, since commercial and investment banks have become increasingly comparable since the Gramm-Leach-Bliley Act was enacted in 1999.

"There are fewer and fewer differences," said Mr. Patrikis, now a partner at Pillsbury Winthrop Shaw Pittman LLP.

He also said the Fed was likely to be lenient on Goldman and Morgan Stanley, especially in light of the ongoing market turmoil. "What I have found is more and more, the Fed has very reasonable views on what is 'financial.' "

Still, now that they are becoming bank holding companies, observers expect Goldman and Morgan Stanley to apply to become financial holding companies. That would give them the authority to engage in activities beyond just taking deposits and other bank-specific operations.

"You have broader powers and can engage in any financial activity," Mr. Schwartz said. "Financial holding companies can do merchant banking or investment banking."

Federal law requires that an institution be a bank holding company before applying to become a financial holding company. The requirements for financial holding companies are relatively vague and easy to fulfill — the holding company and its subsidiaries essentially need only to be well capitalized and managed.

Observers said Goldman and Morgan Stanley will have to adjust to new types of relationships with regulators. The Fed is known as one of the toughest regulators — far more stringent than the Securities and Exchange Commission. "The Fed looks at lending as the Holy Grail of banks," said Douglas Landy, a partner in the banking regulatory practice at Allen & Overy LLP. "That is where banks take all their risks. The Fed wants that to be done with tough standards. The examiners come in with virtually every loan file and ask you a million questions."

Still, no one seems to expect big changes overnight. The Bank Holding Company Act gives new banks two years to transition fully to compliance. At a time when selling assets or raising equity is difficult, many observers say the Fed will use kid gloves as the firms make that transition.

"I would expect the Fed would be pretty lenient in the near term, but as the two-year period gets closer, I'd definitely expect them to get tougher," Mr. Flannery said.

Mr. Van Praag said Goldman had been considering converting to a bank holding company, among other options, since the Bear Stearns Cos. collapse in March.

"The events that started back in March with Bear's problems resulted in us beginning to think very seriously about what the right model was for us," he said. "Bank holding company status was one of the avenues that we explored. We talked to the Fed about it in some detail, and then the events of last week were cataclysmic enough to focus even somebody who had never seen market turmoil before.

"We just decided from a safety and prudence perspective, it made a huge amount of sense to aggressively pursue it," Mr. Van Praag said.

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