NEW YORK, Sept 22: Goldman Sachs and Morgan Stanley sought shelter with the Federal Reserve on Sunday to survive a financial storm that destroyed their rivals, and Wall Street braced for a week of political wrangling over a proposed $700 billion bailout for troubled banks.

Morgan Stanley went a step further and struck a deal with Japan’s largest bank, Mitsubishi UFJ Financial Group, which agreed on Monday to buy up to a 20 per cent stake in the prestigious 73-year-old investment bank, sending Morgan Stanley shares up 10 per cent in morning trading.

The Fed’s agreement to convert the once high-flying investment banks into more conventional depositary institutions was Washington’s latest effort to restore calm to chaotic markets. It followed frantic talks between the Bush administration and Congress to prevent the crisis from pushing the economy into severe recession.

The agreement announced late on Sunday effectively scraps the investment bank model synonymous with Wall Street, ensuring Goldman Sachs Group and Morgan Stanley avoid the fate of rivals that either collapsed or were taken over in the worst US financial crisis since the Great Depression.Both will face a thicket of new regulations, including the capital requirements that have insulated conventional banks from the year-old credit crisis.

The changes will bolster their resources but also curb the spectacular profit growth that have made investment bankers among the highest paid in the nation.

Markets remained sceptical. The Dow Jones industrial average was down 1.2 per cent, led by falls in bank stocks on uncertainty over the proposed $700 billion financial sector bailout, the largest-ever bank rescue.

While US congressional Democrats have expressed support for quick approval of the rescue plan, they cautioned that it must include provisions to guard against potential abuses, raising questions over how long it will take to be passed and what it will ultimately look like.

Democrats, who control both chambers of Congress, expressed concern that the bailout program could expand the powers of the executive branch without adequate oversight — a frequent Democratic criticism of President George W. Bush.

The rescue plan would give sweeping powers to the US Treasury to buy up toxic mortgage-related debt from financial groups, including US subsidiaries of foreign banks.

“We need to see more details from the rescue package. What is missing is the price the US authorities are going to pay for the toxic assets,” said Heino Ruland, analyst at FrankfurtFinanz.

Markets elsewhere in the world were helped as a movement to curtail short selling gathered force: the Netherlands, Taiwan and Australia all announced various curbs over the weekend.

The rescue was cobbled together late in a week of seismic shifts on Wall Street that saw Lehman Brothers Holdings file for bankruptcy, Merrill Lynch & Co agree to sell itself to Bank of America Corp, and the Fed stage an $85 billion rescue for insurer American International Group.

LAST SURVIVORS: Goldman and Morgan Stanley were the last surviving of the big five investment banks that shaped 20 years of Wall Street history. Bear Stearns collapsed earlier this year.

In their heyday, the investment banks took greater risks than their Fed-regulated rivals were allowed to. In return for tighter regulation, Goldman and Morgan Stanley will gain greater access to central bank funds and will find it easier to buy retail banks.

“It creates a perception of greater safety and supervision,” said Chip MacDonald, mergers partner at law firm Jones Day.

After the Fed move, a mooted merger with banking group Wachovia Corp was no longer Morgan Stanley’s priority, a person familiar with the negotiations said.

Mitsubishi UFJ Financial Group moved quickly to announce plans to buy up to one-fifth of Morgan Stanley as part of a strategic alliance that would cost about $6 billion based on Morgan Stanley’s total market value of $30 billion.

Elsewhere, Japan’s biggest brokerage, Nomura Holdings, is to buy the Asian operations of Lehman, a source with direct knowledge of the deal said.—Reuters