New Wall Street model may curb commodity flows

By Jane Merriman and Pratima Desai - Analysis

LONDON (Reuters) - The demise of Wall Street's stand-alone investment banking model could drain more liquidity from commodity markets that have already seen a mass exodus of speculative cash.

Goldman Sachs and Morgan Stanley, the two biggest investment bank players in the energy markets, have agreed to tighter commercial bank-style regulation by the U.S. Federal Reserve as part of plans to restore calm to the financial sector.

The Fed's action is the latest move towards reduction of risk across the finance industry that will, at least in the short term, mean participants in the markets, including commodities and oil, will have less money to play with.

"Liquidity is going to diminish in all areas of financial markets, including commodities. There's no doubt about that," said Ian Morley, director at British-based fund manager Quantum.

However, Goldman Sachs and Morgan Stanley's change of status will not bar them from commodities trading. Commercial banks, such as J.P. Morgan Chase, regulated by the Fed, are active in these markets.

"Our decision to become a bank holding company will have no impact on our commitment to our commodities and energy business," Goldman Sachs spokesman Lucas van Praag said.

A Morgan Stanley spokesman said: "Morgan Stanley has been an active participant in the commodities markets for over two decades. We remain fully committed to our commodities franchise."

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