Goldman and Morgan Stanley face biggest test
It's getting lonely on Wall Street. Bear Stearns melted down in March and has disappeared inside JPMorgan, Merrill Lynch absorbed more than $40 billion (20 billion pounds) in write-downs and rushed into the arms of Bank of America, and Lehman Brothers is being sold for scrap after it declared bankruptcy on Monday.
Morgan Stanley to cut 1000 jobs in U.K. and U.S.Now investors and analysts worry whether even the largest securities firms, Goldman Sachs Group Inc and Morgan Stanley, may be vulnerable as markets lose confidence in the financial foundations on which investment banks are built.
"If you accept that the broker-dealer model is broken - for now at least - it does reasonably lead you to question whether Goldman Sachs and Morgan Stanley can survive. I think that's an increasingly reasonable question to ask," said Les Satlow, a fund manager at Cabot Money Management in Salem, Massachusetts, which manages about $500 million.
That uncertainty was reflected as shares of Goldman sank 12 percent and Morgan dropped 14 percent on Monday, the day Lehman filed for bankruptcy and a day after Merrill agreed to be acquired.
For Goldman, which is expected on Tuesday to report its worst quarterly results since going public in 1999, it was the stock's biggest one-day drop in eight years.
Morgan Stanley, which has been shedding assets since an embarrassing fourth quarter loss last year, likewise will be under pressure to show its house is in order when it reports results on Thursday.
Bottom line: the formula that powered Wall Street profits for most of the past decade - tapping capital markets for debt that can multiply trading and investment returns - is now a liability.
"The days of the gun slingers are gone," said Greg Church, president of Church Capital Management in Philadelphia. "Going out to the market, borrowing money and leveraging up is over. Down the road, they'll all be owned by banks."
Overnight, investors began to pay close attention to leverage, which helps measures how much debt firms use to increase their trading bets, the quality of assets on the balance sheet and the sources of funds used to keep the firms running.
Even after shedding big parts of its mortgage book during the second and third quarter, Lehman still held roughly $80 billion in hard-to-sell property assets that have been falling in value. Gross leverage remained lofty, with total assets that were 21.1 times the size of its stockholders' equity.
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