All eyes on Goldman and Morgan

NEW DELHI: With Lehman Brothers consigned to history and Merrill Lynch having sold out to Bank of America, all eyes are on the two remaining big investment banks on Wall Street. The scrutiny intensified after Morgan Stanley shares took a beating on two subsequent days, amidst talk of it being up for sale, while Goldman Sachs shares also nosedived.
Analysts feel that both banks are now vulnerable as the markets seem to have lost confidence in the financial foundations on which investment banks are built.They say that the whole business model of a brokerage firm is broken.
Professor Nouril Roubeni of New York State University says that ultimately the investment banks will have to merge with the commercial banks, this is in view of the fact that stable funds are a must for a bank to survive. Certainly, banks with access to deposits have a better chance to succeed.
Secondly, when investment banks merge with banks they come under the state regulation, therefore subject to controls.
The commercial banks may be slow in growth but they have dependable earnings as bulk of business comes from retail operations whereas investment bank earnings are more volatile.
Merrill Lynch agreeing to be acquired by Bank of America and Bear Stearns being bought by JPMorgan Chase, might put some pressure on those two banks to do similar deals, feel analysts.
Sanjeev Sanyal, chief Economist, Deutsche Bank, Singapore, says that Goldman and Morgan may have less concentrated risk positions than Lehman or Merrill, relative to their equity and deeper pools of ready cash but what matters is how much pain American financial system is ready to take and reinvent itself. The fact is that both the banks have valuable asset management and private wealth advisory businesses.
Lehman for example held risky assets that were four times the size of its tangible equity, Sanyal said. Morgan Stanley's risk-asset ratio is 1.7 times of equity and Goldman's ratio is closer to 1.4 times equity.
According to several reports, the Big Two have done better jobs spreading bets across markets and countries whereas Lehman still derived the majority of its profit from mortgage securities and Merrill drove into mortgages and leveraged lending just as these markets peaked. A diversified business model of an investment bank and ability to adapt to different market environments may make them wade the storm feel some analysts. For instance, Goldman Sachs decided to scale up private equity business in India.