Goldman Sachs and Morgan Stanley, with three of their rivals vanquished this year, on Tuesday vowed to remain independent as Wall Street faces its biggest shake-out since the Great Depression hit nearly 80 years ago.
The last two major independent investment houses both posted third-quarter profits despite continued chaos in the financial markets. And their top brass rejected suggestions they must find partners to survive the ongoing credit crisis.
Global banks and brokerages have written down more than US$350 billion from wrong-way bets on mortgage investments and other risky securities during the past year. The upheaval in the US financial system has driven Merrill Lynch & Co and Bear Stearns Cos into emergency sales, and Lehman Brothers Holdings Inc into bankruptcy.
Now, more than ever, analysts are questioning if the stand-alone investment banks that have dominated Wall Street for generations are close to extinction. Eroding investor confidence in the financial industry has prompted questions about whether Goldman and Morgan Stanley need to partner with commercial banks, whose deposits are a more stable.
Commercial banks tend to have slower growth but more dependable earnings since a bulk of the business comes from retail operations. Investment bank earnings are more volatile, and rise or fall on businesses like investment banking and trading.
However, both Goldman Sachs and Morgan Stanley are demonstrating that they have the business model needed to take advantage of the market’s dislocation and remain independent.
Goldman Sachs on Tuesday reported its biggest slump since going public in 1999. Still, the larger of the two remaining major US investment banks beat profit expectations despite a 71 percent decline from last year.
Goldman Sachs posted a profit after paying preferred dividends of US$810 million, or US$1.81 per share, compared to US$2.81 billion, or US$6.13 per share, a year earlier. Revenue for the three months ended Aug. 29 skidded 51 percent to US$6.04 billion.
The results beat Wall Street projections for US$1.71 per share, according to analysts polled by Thomson Reuters.
Revenue fell short of the US$6.23 billion expected by analysts.
On a conference call with analysts, Goldman chief financial officer David Viniar was questioned about the investment bank’s viability without doing some kind of deal.
“We cannot stop the rumors and we cannot stop the fear,” Viniar told reporters during a conference call. “Right now, we think our business model works because our business works. Our performance speaks for itself and will continue to speak for itself.”
His counterpart at Morgan Stanley, Colm Kelleher, made similar comments after the investment bank announced quarterly results one day ahead of schedule. Results were initially scheduled for yesterday.
Morgan Stanley reported a profit of US$1.43 billion, or US$1.32 per share, compared with US$1.54 billion, or US$1.44 per share in the year-ago period.
Thomson Reuters said analysts expected earnings of US$0.78 per share.
Revenue rose modestly to US$8.05 billion from US$7.96 billion.
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