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I reviewed Morgan Stanley (NYSE:MS) earnings in detail on Wednesday, after covering the bull case for the stock last month. In short, I argued on Wednesday that third quarter earnings should comfort investors concerned about an all-out collapse; and I argued a month ago that if MS can avoid that all-out collapse, it seems almost certain to rise, given its then-35 percent, and now 40-plus percent, discount to tangible book value.

Morgan's Wall Street rival Goldman Sachs (NYSE:GS) reported earnings on Tuesday, posting only its second quarterly loss in 12 years as a publicly traded company. The company lost 84 cents per share, or $1.70 per share excluding a debt valuation adjustment (DVA). DVA allows financial companies to book a gain on its own debt when the price of that debt has declined on the open market, as theoretically the company can buy back that debt at a lower rate. Goldman chose to hedge that gain, resulting in a DVA adjustment of only $450 million, relative to Morgan Stanley's $3.4 billion.

That $3.4 billion made up the bulk of Morgan Stanley's earnings, as the headline number of $1.14 per share consisted of $1.12 in DVA, and only 2 cents in operating earnings. Both numbers, while hardly awe-inspiring, beat estimates and rival Goldman, marking the second consecutive quarter MS has seemed to outpace its chief competitor.

On the business front, Morgan Stanley appeared to make some inroads, most notably in the fixed-income business, where its market share grew from 4.9% to 6.6% year-over-year. While business at both firms was devastated by the market drop and freeze in IPO and M&A activity, Morgan saw only a 41% drop in its institutional division, versus a 46% fall for Goldman.

On the balance sheet, Morgan Stanley also appears to be outpacing Goldman. Liquid assets for both companies stood at about $180 billion at quarter's end, though Morgan Stanley's smaller balance sheet gives it a relative edge. While Goldman spent $2 billion buying back stock during the 3rd quarter at about $121/share (relative to the $100 price as of this writing), Morgan Stanley spent $6 billion buying back debt at depressed prices, further strengthening its balance sheet. (Goldman, instead of opting to repurchase debt, instead issued more this week, selling 50-year bonds to retail investors.)

Net European exposure (counting hedges) for both firms stood a little over $2 billion ($2.1 for MS, $2.5 for Goldman), both seemingly manageable given the firms' multi-billion balance sheets and cushion between tangible book value and market capitalization.

It is that cushion that seems to make Morgan Stanley the better buy at this point. MS offers a share price of $16.39 (as of 2 PM EST on Thursday), and a tangible book value of $27.79, thus trading at a 41% discount to its assets. Goldman, on the other hand, at its current price of $99.60, offers just a 17.3% discount.

Going forward, Morgan Stanley may have the edge as well. Goldman has traditionally been the top dog on Wall Street; indeed, its investment banking unit still ranks first in IPO's, M&A, and equity offerings, according to its third quarter conference call (Morgan Stanley is #2 in all three areas, according to its own conference call). But in the future, Wall Street firms may not have the same ability to generate cash from investment banking transactions, as a choppy market and increased government regulation lower revenues.

The "Volcker rule", which prevents bank holding companies from proprietary trading activities, will likewise harm Goldman more than Morgan Stanley, as the Goldman desk has traditionally been more successful, and a greater driver of profits, than the unit at MS, which will be spun off next year.

Simply put, the business has changed on Wall Street. With new financial regulation, including the "Volcker rule", either enacted or on its way, exotic financial instruments, high leverage and exorbitant compensation will need to be replaced with a focus on traditional activities such as underwriting and asset management.

Morgan Stanley's 2009 purchase of Smith Barney has strengthened its wealth management business, which now nearly doubles that of Goldman in terms of assets under management. And one wonders whether the impact of 2008-2011 on Goldman's reputation -- notably its tarring as the "great vampire squid" of American finance -- will affect its profitability in equity and bond issuance.

Given all that, investors should ask: why is Goldman trading at a substantial premium to Morgan Stanley on a balance sheet basis? Assigning Goldman's premium to MS stock would value Morgan Stanley at $23 per share, a 40% gain. As I've argued previously, both stocks are high-risk, high-volatility, high-reward, long-term plays. But given the larger cushion at Morgan Stanley, its accelerated focus on cleaning up its balance sheet, and the potential to challenge Goldman Sachs in the key revenue drivers of the future, MS looks to be the better play.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.