Even the mighty are falling. The last two major independent investment banks on Wall Street, Goldman Sachs (GS) and Morgan Stanley (MS), have received permission from the Federal Reserve to convert from traditional investment banks into commercial banks or bank holding companies. Plenty of ink, digital or otherwise, has been spilled about the disappearance of investment banks so I won’t dwell much on that. We’ve seen the collapse of Lehman Brothers (LEH) and Bear Stearns. Still somehow, I’m sure there were some who sentimentally held out hope that the two shiniest of white shoe firms in investment banking would survive relatively unchanged. Disappointingly, Goldman Sachs and Morgan Stanley will now join the ranks of Bank of America (BAC) and Wachovia (WB) as large commercial money center banks serving the retail masses.

It remains to be seen what will happen to the investment banking businesses of Goldman and Morgan. Other commercial money center banks like Bank of America and Citigroup (C) have been able to operate smaller investment banking divisions within the corporate umbrella. While the market is caught up in short-term financial myopia (worthwhile because some fear a total meltdown), I’m more interested in the long term strategic implications.

Survival – It is clear that the decision to convert to a commercial bank was spurred in part by a need to raise capital and survive. Becoming commercial banks allows Goldman and Morgan to tap the emergency funds that the Fed has made available. Goldman has also reached an agreement to secure private funding as well from Warren Buffett, the head honcho at Berkshire Hathaway (BRK-A). Morgan has agreed to sell a piece of itself to Mitsubishi UFJ Financial Group (MTU), in a move reminiscent of the Japanese shopping spree of the 1980s. In the panicked rush to shore up our faltering financial system and institutions, have we given enough thought to these combinations and their future implications?

Initial Public Offerings – Goldman Sachs and Morgan Stanley consistently topped the league tables as the best bulge bracket firms with the power and reach to handle large IPOs. No one is thinking of going public in this market environment but there will come a time when all is right again and innovative businesses will want to go public. Who will be there to sell the hype and coordinate the logistics?

Pure Investment Banks – Will there be a changing of the guard? The investment banking divisions within commercial bank holding companies have never been able to win more business than the Goldmans and Morgans and Lehmans that focused deeply on investment banking and merchant banking. Is it reasonable to assume that Goldman and Morgan will maintain their dominance of investment banking while converting into commercial banks? I think there is merit in the focus of pure investment banking. It will be interesting to watch if other players like Jefferies Group (JEF), Greenhill & Company (GHL), and Stifel Financial (SF) can aggressively move to fill the void. I think these stocks will perform well over the long term as they jockey to become the next white shoe firm (so long as they haven’t gotten involved with all the toxic financial instruments floating out there).

Talent Exodus – Look to the Yahoo! (YHOO) saga to see that Talent (with a capital T) goes where the opportunity is best and where it can operate with the least restraint. Goldman and Morgan will see their cream of the crop flee to hedge funds or the remaining smaller, albeit pure play, investment banks to ply their trade. Goldman’s proprietary traders generated a majority of the firm’s profits so I expect those guys will find happy homes at hedge funds. Why would any truly good trader want to be a part of Goldman Sachs now? On the other hand, I’ve rarely seen a guy from the sell side of investment banking be able to withstand the ruthless performance pressures of the buy side though so I expect there will be a ton of unemployed investment bankers. My how MBA programs will be flooded with applications. Brush up on those GMATs cause you’re going to be competing against a horde of former ibankers. Why would any truly good trader want to be a part of Goldman Sachs now?

There is a lot of knee-jerk anger and many hyperventilating voices calling for change and placing blame on government, government officials, greedy business executives, mindless consumers, etc. I’m over that already, in fact, I’ve never been there in the first place. I’m only interested in profiting from what the future will bring and what we can learn from history. In that light, let me end by quoting one of the great Founding Fathers.

“All human situations have their inconveniences. We feel those of the present but neither see nor feel those of the future; and hence we often make troublesome changes without amendment, and frequently for the worse.” – Benjamin Franklin (1706 – 1790)

A few days ago, I remarked how precariously positioned the investment banks had become. Today, we witnessed something spectacular as these once proud institutions accelerated their fall. Bear Stearns (BSC) will be taken over in a fire sale for approximately $2 per share by JPMorgan Chase & Co. (JPM) with backing from the Federal Reserve. Lehman Brothers (LEH), which has a similar business model to Bear, saw its stock take a dive on fear that it too faces liquidity problems.

Yesterday, Fed chair Ben Bernanke took the unusual step of lowering rates and extending loans to investment banks only two days ahead of the regularly scheduled Fed meeting. The high priests of the central banking system are in full panic mode now and I suspect them to lower a key interest rate by at least 75 basis points and probably by 100 basis points. If Bernanke & Company are going to try and avert financial disaster, they may as well take bold steps. The market will most certainly react very negatively to an interest rate cut of less than 75 basis points.

Does the Bear Stearns buyout make it an interesting speculative short, even this late in the game? JPM’s acquisition price of $2 per share is much less than today’s closing price of $4.81 per share in BSC. Large shareholders of BSC will no doubt revolt at the $2 liquidation price tag but there aren’t many options left on the table. Without a buyer, BSC will likely declare bankruptcy and there aren’t many other banks around with the support of the Fed underwriting the first $30 billion in risk on the BSC balance sheet.

In the aftermath of this debacle (whenever that may be), many value investors will attempt to pick the good apples off the ground while leaving the bruised ones to rot by the tree. Mostly prudently run ibanks like Goldman Sachs (GS) will need a good dusting off, but will be relative bargains worthy of inclusion in a value portfolio. Note, even the mighty Goldman is rumored to be gearing for a $3 billion writedown when it reports earnings Tuesday. I suspect that Merrill Lynch (MER), whose business model is most unlike the Bears and Lehmans of the world, will weather this storm and come out much weaker but capable of recovery.

The really big question: Does Mr. Bernanke have enough firepower and “influence capital” left to avert another disaster if Lehman becomes the next casualty? At the very least, he has proven himself unafraid to take drastic measures.

Bear Stearns plunges amid trade risk worries – Bear Stearns (BSC) was a pathfinder in the securitization of mortgages, but its over-reliance on mortgage-backed securities led to big losses in a couple of its hedge funds. Now external hedge funds, clients of its prime brokerage, are fleeing in droves for fear the bank lacks sufficient cash or liquidity. Oh how our mighty investment banks have fallen. Funny how the top in these stocks coincided with record numbers of MBAs coming out of our business schools to join the likes of Goldman Sachs (GS), Merrill Lynch (MER), Morgan Stanley (MS), and Lehman Brothers (LEH).

DCP Midstream Prices Public Offering – Not all is well in the energy sector. DCP Midstream Partners (DPM), a producer and marketer of natural gas, is selling shares in the company at a time when the stock price is hitting new lows. Management is in a quandary because operational results have been poor but cash is running low while debt remains high.

Sigma Designs Q4 earns miss market view; shares fall – Anyone want to tell me that the shorts are wrong? They’re practically skipping to the bank. Sigma Designs (SIGM) makes chips that control television set-top boxes and Blu-ray players. The company reported strong earnings but missed estimates; check the earnings call transcript here. Since Blu-ray has essentially won its war against HD-DVD, Sigma should be a turnaround candidate.

Air Methods 4Q net earnings beat Street expectations – The world’s largest air medical transportation company in the world is expanding its fleet and beating the Street’s estimates. Air Methods (AIRM) stock has taken a hit lately and has a sizable short contingent.

S&P: Write-downs may be halfway done – This little tidbit has coincided with a big turnaround in the stock market. What started out as a huge down day has reversed and the markets are in positive territory. The more important question is how reliable is Standard & Poor’s Ratings Services (MHP) given that it did not see the subprime meltdown in the first place? What are the fatal flaws in their analysis? Has any consideration been given to the possibility that prime mortgages could fail if real estate prices continue to fall nationwide?