The Federal Reserve said Sunday it had granted a request by the country's last two major investment banks — Goldman Sachs and Morgan Stanley — to change their status to bank holding companies.

The Fed announced that it had approved the request of the two investment banks. The change in status will allow them to create commercial banks that will be able to take deposits, bolstering the resources of both institutions.

This is the death knell for the markets. What Morgan and Goldman will do in the morning is call their holders who have substantial holdings in their accounts and say to them, "We expect the current downturn to continue, and recommend that you place $100K into a commercial account with us now that we have this nice commercial bank attached. That amount will be FDIC insured, 100% protected, and we'll even give you a nice interest rate on the deposit." Their customers, scared out of their gourds by last week, will do so and the move will make the downward prediction self fulfilling.

This is a sound individual move for Morgan and Goldman, it shores up their liquidity problem, their cash holdings increase, but a disastrous move for the markets at large as the money flows out of the markets and is not reinvested in something else in the markets. It is an outflow with no corresponding inflow. It's a trigger event for 1-800-RUN.

Stack on top of it the current refusal (and wisely so) to hand a blank check to the White House on how to resolve the market crisis, and you have a recipe for catastrophe. It should not be as enormous a wreck as handing over the black check, but buckle up.

Last major investment banks change status - Yahoo! News