It seemed a straightforward maneuver: With markets deteriorating, Goldman, Sachs & Co. and Morgan Stanley on Sunday, Sept. 21, asked for and received approval from the Federal Reserve to turn themselves into bank holding companies, or BHCs -- effectively erasing, for now, the presence of bulge-bracket investment banks on Wall Street.

The two redoubtable firms take on a heavier regulatory burden and (undoubtedly) less leverage in exchange for access to stable funding sources, like federally insured deposits, and expanded rights to borrow from the Fed's discount window.

In fact, the transformations of the last of the big Wall Street investment banks may be just the beginning.

This seemingly bureaucratic shift will have large implications. The pair may want to seek to buy traditional commercial banks to provide, say, deposit bases. In the long run, everything from compensation practices to recruitment to culture may change. Some businesses will wither or simply look less appealing under new capital conditions. Other businesses may find themselves violating traditional banking rules and need to be divested. Of particular sensitivity to regulators: the two newly minted banks' ability to trade and own commodities, real estate and some proprietary trading activities.

"There will be some detailed looking at what's involved," says a financial services lawyer at a New York firm. "There's a lot of negotiating that will need to be done."

Indeed, Morgan Stanley gave notice of how seriously it's taking the transformation by announcing on Sept. 25 that it hired Eugene A. Ludwig, former U.S. comptroller of the currency, to advise on the conversion.

The banks must comply with legislation that governs banking in the U.S., namely, the Bank Holding Company Act and the Financial Services Modernization Act of 1999, also known as the Gramm-Leach-Bliley Act. Those bills spell out which businesses commercial banks, as custodians of federally insured deposits, cannot enter, such as transportation, commodities and real estate.

Both Lloyd Blankfein's Goldman Sachs and John Mack's Morgan Stanley have holdings in those restricted businesses. However, the law gives them two years to conform to the holding company act, with the possibility of three one-year extensions, for a total of five years. Those extensions, of course, will depend on the willingness of regulators -- meaning the Fed -- to grant them. And that could depend on the regulatory climate over the next
few years.

Both Goldman and Morgan Stanley representatives believe that the extensions will provide them more than enough time to reconcile those business lines with regulators. Regardless, they add, they expect few, if any, divestitures. "We don't believe we'll have to get out of any businesses," says Lucas van Praag, a Goldman spokesman. Adds Morgan Stanley's Mark Lake, "There will not be much in terms of divestitures."

Perhaps. But there are clearly issues. Take Goldman and Morgan Stanley's commodities businesses. According to Morgan Stanley's corporate filings, the investment bank trades as a principal and has proprietary trading positions in the spot, forward and futures markets in commodities such as metals, crude oil, fuel, power and other energy materials. It also owns three power plants in the U.S. and one in the Netherlands. On Sept. 1, 2006, it acquired TransMontaigne Inc., which distributes fuels, and Heidmar Group, an oil
tanker business.

For its part, Goldman owns commodities brokerage J. Aron & Co. (which Blankfein joined as a gold bar and coin salesman in 1981) and, according to Bloomberg News, is the largest shareholder of CVR Energy Inc., an oil refiner. Goldman also owns Fleet Trade & Transport Ltd., an oil shipper.

While the bank holding company rules technically deem companies or assets like these "nonfinancial," and hence out of bounds for financial firms, the banks may be able to retain them. In fact, Gramm-Leach-Bliley specifically grandfathers a bank's ability to trade or own commodities as long as it was doing so before Nov. 12, 1999. This seems to exempt Goldman's J. Aron business, which Goldman bought in 1981.

Douglas Landy, a partner at law firm Allen & Overy LLP, notes that, over the years, the Fed has used its discretion to allow bank holding companies to get into commodities trading, having given Citigroup Inc. and J.P. Morgan Chase & Co. waivers to do so in 2003 and 2005, respectively. "The Fed has been evolutionary in its approach to granting commodity powers," he says, adding that the regulator has justified this by noting that owning physical commodities is financially connected to trading derivatives contracts on the
commodities exchanges.

In its order authorizing J.P. Morgan's commodities business, the Fed noted that minimizing risk to the bank is of prime importance. As such, the bank "would not be authorized to own, operate, or invest in facilities for the extraction, transportation, storage or distribution of commodities; or to process, refine, or otherwise alter commodities." This suggests that Goldman's involvement in shipping and oil refining and Morgan's power plants and transportation business may need to be shed.

Regulators also seem to have taken a hard line against bank holding companies owning real estate. Indeed, in the J.P. Morgan order, the Fed noted that it wanted "to prevent JPM Chase from becoming involved in dealing in finished goods and other items, such as real estate, that lack the fungibility and liquidity of exchange-traded commodities."

Morgan Stanley in May 2007 bought real estate investment trust Crescent Resources LLC in a $6.5 billion deal. The REIT's assets sit on Morgan Stanley's balance sheet, and its $4.6 billion of investments in commercial properties will need to
be divested.

The same holds true for Goldman's investment in Archon Group LP, "a small part" of which spokesman van Praag says "will need to be restructured." He declines to provide details, noting that it's too early to say anything definite.

Goldman, however, seems to be giving itself as much wiggle room as possible through its BHC filing. The Fed orders approving the banks' applications point out that Morgan Stanley has filed an election to become a "financial holding company," while Goldman "expects promptly" to
do so.

The status of financial holding company, says Washington-based lawyer Gilbert Schwartz, is conferred on BHCs that are considered well capitalized and well managed, and gives them the right to engage in a wider variety of business lines, including merchant banking.

Given that Goldman Sachs has a huge private equity business, it seems likely that getting FHC status would be a priority. Van Praag says that Goldman will do so shortly but declines further comment.

One lawyer, notes, however, that the bank effectively has five years to comply, so it may not need to jump the gun, especially in light of more onerous capital requirements placed on financial, as opposed to bank, holding companies. Under the law, BHCs must keep their Tier 1 capital ratios at 4% and their total capital at 8% to be considered well capitalized. For their part, FHCs must keep Tier 1 at 6% and total capital at 10%.

That wiggle room might come in handy if further losses mount, the lawyer says. "Five years is a lifetime in banking," he says. If recent events are a guide, so are two weeks.