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FINANCIAL SYSTEM IN CRISIS

Wall Street elite take hits as well

Shares in Goldman Sachs and Morgan Stanley slide despite their relative health.

September 17, 2008|Walter Hamilton | Times Staff Writer

NEW YORK — Goldman Sachs Group Inc. and Morgan Stanley have long been the premier firms on Wall Street, but angst-ridden investors are turning on even them as the mood in the financial industry darkens.

Shares of the two companies fell on enormous trading volume for a second consecutive day Tuesday as investors grew increasingly nervous about the fate of Wall Street's last two independent investment banks.

The anxiety was crystallized when Morgan, which has been pounded the hardest, rushed out its quarterly earnings report a day early.

After tumbling 28% early Tuesday, Morgan's shares closed down $3.49, or 10.8%, at $28.70. The stock has skidded 23% this week.

Morgan reported a better-than-expected 7.6% drop in earnings, boosting its stock to $31.75 in after-hours trading. But the slide quickly resumed and the stock sank below $28.

In a conference call with securities analysts, Colm Kelleher, Morgan's chief financial officer, voiced his frustration at the market frenzy that has now engulfed his company.

"I believe this nonsense will end," Kelleher said, adding "things are frankly getting out of hand and ridiculous rumors are being repeated."

Goldman shares slumped more than 14% early in the day, but recovered most of that after the company beat analyst estimates despite a 70% drop in third-quarter profit. The stock lost $2.49, or 1.8%, to close at $133.01.

Trading volume in Goldman shares was more than four times the average over the last 90 days, while Morgan's was more than five times higher.

No one expects Goldman or Morgan to suffer the same fate as Bear Stearns Cos. or Lehman Bros. Holdings Inc., which were effectively pushed out of business by the firestorm over bad real estate debt that is relentlessly battering the financial sector.

But investors are worried that, like their competitors, both companies are stuck with highly leveraged assets that they can't easily get off their books.

There also is concern that the two companies could suffer losses tied to Lehman or to teetering insurance giant American International Group Inc.

"Everybody's convinced that every financial institution has an umbilical cord tied to every other financial institution, and that the dominoes will all go together no matter who they are, which is extremist and ridiculous," said Robert Albertson, a principal at Sandler O'Neill & Partners, a New York investment firm.

There's also concern that earnings will be pinched by the souring economy, bleak outlook for core businesses such as investment banking and the general shrinkage of trading opportunities as the rest of Wall Street contracts.

Finally, there is concern that the classic investment bank business model is no longer viable in the financial system's changing landscape. Gone are the days when firms could finance their investment and securities operations through short-term borrowing in the capital markets.

There is speculation that even the once-unassailable Goldman and Morgan might have to either buy commercial banks, whose sources of funding are much cheaper, or sell out to banks, as rival Merrill Lynch & Co. did to Bank of America Corp.

Kelleher attempted to shoot down such thoughts, saying investment banks have withstood scores of downturns over many decades.

Commercial banks "do not necessarily better enable us to execute our business and in fact may bring their own set of complications," he said.

The sell-off in the two stocks is akin to the hits that shares of major technology firms suffered during the dot-com bust, said David Ellison, president of the FBR mutual fund group.

Investors knew that tech leaders such as Microsoft Corp. and Cisco Systems Inc. were well run, but they didn't know how badly the industry meltdown would hurt them, he said.

"When things get ugly they test everybody," Ellison said. "They're going to test Morgan and Goldman."

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walter.hamilton@latimes.com

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(BEGIN TEXT OF INFOBOX)

The big boys

Goldman Sachs

Headquarters: New York

Chief executive: Lloyd C. Blankfein

Founded: 1869

Employees: 31,495

Assets: $1.09 trillion

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Morgan Stanley

Headquarters: New York

Chief executive: John J. Mack

Founded: 1935

Employees: 46,390

Assets: $1.03 trillion

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