GS, MS: Do Wall Street's Independent Brokerages Have a Future?

Last of a dying breed? Morgan Stanley (MS) and Goldman Sachs (GS) remain Wall Street's two independent brokerage houses, and for that fact, their shares are being sold off heavily day in and day out. Despite the fact that both companies beat reduced earnings expectations for the quarter, they are being lumped into the same selling frenzy as their industry com padres due to their heavy reliance on leveraged investments.

Goldman profit fell 70% year-over year but the company still managed to make ends meet. The yearly comparisons are not pretty considering Goldman's record 2007 financial year. $810Million in profit ($1.81/share) vs. $2.81Billion ($6.13/share) last year. Overall revenue was down also from $12.3Billion to $6.04Billion.

Morgan Stanley, which had its own set of difficulties over the year reported profit that fell 3% year over year, $1.43Billion vs $1.47Billion, which translates into $1.32/share this quarter. With net revenue reaching $8Billion, a 1% year over year increase, Morgan showed it can still deliver results, however the pressure on the company to make a deal with a bank is staggering.

It's the old leverage issue again, as Investors feel the only way to shore up capital and assure broker survival is to pair up with a bank and the giant vault of deposits that go along with it. When Merrill Lynch (MER) made the deal with Bank Of America (BAC), followed by Lehman Brothers' (LEH) bankruptcy, both of which followed JP Morgan Chase's (JPM) rescue of Bear Stearns, the Street was down to two stand-alone investment houses.

The rumor mill has run wild of late regarding Morgan, with reports of conversations with Citigroup (C), Wachovia (WB) and China Investment Corporation, which if done would leave Goldman Sachs as the sole big name brokerage left on Wall Street. Investor publications have held a positive opinion so far on BAC's deal for Merrill, so for Citigroup or Wachovia, picking up Morgan Stanley on the cheap would also feel like a win.

However, in the turbulent times that are continuing, with a financial crisis unlike any seen in most Investors' lifetimes, the "Let's make a deal" talks are very cautious to say the least. If Morgan does join with a bank, and signs are pointing that way, Goldman will find itself in a unique position, having its main competitors under the corporate shells of some of the largest financial institutions in the country. The optimist finds that this will allow Goldman to thrive as the economy strengthens and underwriting and M&A advisory work become more prevalent, but the pessimist finds a single brokerage model struggling to survive in these economic tidal waves.

As markets see-saw between down 400 point and up 400 point days, the successful trade is being on the optimist or pessimist part of the see-saw on the correct day. Lately, though, the pessimism has run rampant.

Comments

[nycDem:]

thanks for the comments, chris. it's tough to get perspective in this market. too much information. much of it rumors. appreciate the attempt at a concise roundup.

2008 Sep 18 07:16 PM

[investor88:]

We have to be correct to the day, it just indicates high volatility and uncertainty. With pessimism overdone, there may be a countertrend rally but it is too early to call for a bull market.

2008 Sep 18 09:44 PM

[helplessobs...:]

I bet GS would like to have some of that obscene $27B in bonuses it paid out to employees last year. With 6% of GDP, bankers obtain 27% of total national compensation. They are way overpaid from the janitor to the board room.

2008 Sep 18 11:34 PM