Goldman Sachs and Morgan Stanley have decided not to remain as investment banks saying that investors have determined the model is broken. Their applications to become banks were approved unanimously at a Federal Reserve Board meeting over the weekend.

The move comes 75 years after the US Congress separated investment banks from deposit-taking lenders under the 1933 Glass-Steagall Act and was precipitated by last week’s turmoil in the financial markets.

The newly constituted banks will now be regulated by the Federal Reserve, and will now be able to build their deposit base, potentially through mergers and acquisitions.

The decision to move away from investment banking will cast the spotlight onto the two banks’ profitable wealth management operations, where retail and investment banking are often said to merge.

Analysts quoted by Bloomberg commented that the move “marks the end of Wall Street as we know it” and that “deposit-banking is king right now…it's the only meaningful critical-mass way to make money.''

The move to become a deposit-taking bank gives Morgan Stanley more time to contemplate alternatives to the deal that it began to shape last week with Wachovia, Tony Plath, a finance professor at the University of North Carolina at Charlotte, told the newswire.

“Morgan Stanley is going to try to go it alone, and I expect it will try to buy a bank with a market-to-book ratio that is next to nothing. It means they are walking away from Wachovia,'' he said.

“This new bank holding structure will ensure that Morgan Stanley is in the strongest possible position. It also offers the marketplace certainty about the strength of our financial position and our access to funding, chairman and chief executive officer John Mack said in a statement.

His views were echoed by Lloyd Blankfein Goldman's chairman and CEO who said in a statement: “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.”

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