As Morgan Stanley and Goldman Sachs see their stocks pummelled on Wednesday, Wall Street is realizing this is no longer about financial results.
Investors are saying that the independent investment banking model no longer works.
White-shoed Morgan Stanley announced a $1.47-billion operating profit on Tuesday, and 16 per cent ROE. The market responded to these better-than-expected results with the worst one-day shellacking the storied company has ever seen - Morgan Stanley stock is off 33 per-cent in this session.
The world is quickly coming to a view expressed by CIBC World Markets CEO Richard Nesbitt at a conference on Monday. Mr. Nesbitt said: ““I don't think around the world there's any place for a large investment bank unless they're part of a commercial bank. I don't think they'll exist, except for the very, very tiny investment dealers.”
Many of us thought that view was a tad extreme, if not flat wrong. Yet in the wake of fire sales at Merrill Lynch and Bear Stearns, the failure of Lehman Brothers and the nationalization of AIG, lots investors are coming to Mr. Nesbitt's view. They are not willing to take a chance on leveraged financial plays. Or they are shorting the remaining independent dealers on the theory that the trend is a friend.
Hedge funds are cutting back on trading Wednesday with Morgan Stanley and, to a lesser extent, Goldman Sachs, on fears that the carnage on Wall Street is not complete. Banks are all looking at counter-party risk to the Wall Street dealers - derivative contracts, overnight financing, and short-term commercial paper holdings.
“There is now a question about the viability of any financial institution that relies on funding from the wholesale market,” said one bank executive.
That means there are fears that venerable Morgan Stanley may face the same sort of liquidity crunch that crippled Lehman Brothers and Bear Stearns, as investors suddenly grow uncomfortable with investment banks that hold long-term liabilities such as mortgage portfolios, backed by short-term assets that include overnight loans and 30-day commercial paper.
Suddenly, there is chatter that Morgan Stanley may be driven into the arms of Citibank or, irony of ironies, J.P. Morgan. The Wall Street approach to capital markets has worked for generations. This week, that proven, lucrative strategy is very much in question.
