Investment banks accept new regulation; White House and Congress agree on bail-out; Japan elects new PM; Bush and Hu talk about financial turmoil; and Mbeki resigns

Top of the Agenda: Investment Banks Overhaul

Goldman Sachs and Morgan Stanley, the two remaining independent U.S. investment banks following the collapse of Lehman Brothers and sale of Merrill Lynch, agreed to sweeping changes in how they are regulated in a move that promises to fundamentally alter the structure of the international financial sector. The New York Times reports the banks will transform into bank holding companies, subject to greater government regulation. The paper says the banks requested the move themselves-a "radical move" and an "acknowledgment that their model of finance and investing had become too risky and that they needed the cushion of bank deposits," like big commercial banks.

The move ends an era that lasted the better part of a century in which regulation of investment banks and commercial banks was kept separate-though this policy had already begun to erode, particularly with the takeover of Merrill Lynch by the commercial bank Bank of America. During much of the twentieth century, high-flying investment banks served as a motor for U.S. capitalism through their investments. Now, the Wall Street Journal summarizes, "Wall Street as it has long been known...will cease to exist."

The move also comes amid a major push for reform in Washington. The Chicago Tribune reports Congress and the Bush administration have reached general agreement on a $700 billion plan to shore up the economy, which will also grant sweeping new oversight powers to the U.S. Treasury Department. The Journal reports that late in the weekend Treasury Secretary Henry Paulson supported appeals for foreign-owned banks to be included in the rescue plan. Some analysts worry about the long-term impact of the legislation. This recent Daily Analysis notes that the effort to create oversight capacity could potentially backfire if U.S. investment bankers jump ship for hedge funds or overseas financial firms subject to less regulation.