Goldman Sachs and Morgan Stanley may eventually escape proprietary trading ban

Goldman Sachs and Morgan Stanley may ultimately avoid a ban on bank proprietary trading under the Wall Street overhaul.

As part of the Senate financial regulatory debate, Democrats want to bar big banks from proprietary trading. Large non-banks would face potentially higher capital standards under the legislation to account for their trading activities. The restrictions are part of an amendment sponsored by Sens. Carl Levin (D-Mich.) and Jeff Merkley (D-Ore) that has yet to come up for a Senate vote.

Julie Edwards, spokeswoman for Merkley, said on Tuesday that two of Wall Street's heavyweights -- Goldman Sachs and Morgan Stanley -- would not fall under the explicit prohibition in the future if they decided to no longer function as bank holding companies.

Goldman Sachs and Morgan Stanley converted to bank holding companies during the financial crisis in 2008.

Senate Banking Committee Chairman Chris Dodd's (D-Conn.) Wall Street overhaul legislation includes a provision, known as "Hotel California," that would increase Federal Reserve oversight of firms that decide to convert away from bank holding companies.

Dodd's provision covers financial companies that as of Jan. 1, 2010 were bank holding companies with at least $50 billion in assets and that received capital from the $700 billion bailout package. That provision would cover Goldman Sachs and Morgan Stanley.

In the future, if the companies convert away from bank holding companies and are no longer depository institutions, they would be considered non-banks. Edwards said that the two firms would then face potentially higher capital requirements but not the blanket ban.