It's getting lonely on Wall Street

New York: It's getting lonely on Wall Street.

Bear Stearns melted down in March and has disappeared inside JPMorgan Chase & Co, Merrill Lynch absorbed more than $40 billion in write-downs and rushed into the arms of Bank of America, and Lehman Brothers is being sold for scrap after it declared bankruptcy.

Now investors and analysts worry whether even the largest securities firms, Goldman Sachs Group Inc and Morgan Stanley, may be vulnerable as markets lose confidence in the fin-ancial foundations on which investment banks are built.

"If you accept that the broker-dealer model is broken, for now at least, it does lead you to question whether Goldman Sachs and Morgan Stanley can survive," said Les Satlow, a fund manager at Cabot Money Management in Massachusetts that manages about $500 million.

That uncertainty was reflected as shares of Goldman sank 12 per cent and Morgan dropped 14 per cent on Monday, the day Lehman filed for bankruptcy and a day after Merrill agreed to be acquired.

For Goldman it was the stock's biggest one-day drop in eight years.

Morgan Stanley, which has been shedding assets since an embarrassing fourth quarter loss last year, likewise will be under pressure to show its house is in order when it reports results on Thursday.

Bottom line: the formula that powered Wall Street profits for most of the past decade, tapping capital markets for debt that can multiply trading and investment returns, is now a liability.

"The days of the gun slingers are gone," said Greg Church, president of Church Capital Management in Philadelphia. "Going out to the market, borrowing money and leveraging up is over. Down the road, they'll all be owned by banks."

Overnight, investors began to pay close attention to leverage, which helps measures how much debt firms use to increase their trading bets, the quality of assets on the balance sheet and the sources of funds used to keep the firms running.

Even after shedding big parts of its mortgage book during the second and third quarter, Lehman still held $80 billion in hard-to-sell property assets that have been falling in value. Gross leverage remained lofty, with total assets that were 21.1 times the size of its stockholders' equity.

In this more hostile environment, where investors will punish companies seemingly flush with cash and capital, Goldman and Morgan Stanley may also feel pressure to merge with a big deposit-rich bank.

"These companies also probably thought, not too long ago, that a crisis of confidence couldn't happen to them. Recent events demonstrate no rational presumptions can be made simply based on fundamentals," Fox-Pitt, Kelton analyst David Trone said. "These two will look at potential commercial bank partners."

No meltdown

Most analysts and investors stress they do not expect Goldman and Morgan to melt down.

UBS analyst Glenn Schorr said Goldman and Morgan have less concentrated risk positions than Lehman or Merrill, relative to their equity; deeper pools of ready cash and more reliable sources of funding. Goldman and Morgan also have valuable asset management and private wealth advisory businesses.

The Big Two also have done better jobs spreading bets across markets and countries. Lehman still derived the majority of its profit from mortgage securities, while Merrill dove into mortgages and leveraged lending just as these markets peaked.

"Goldman and Morgan Stanley are more diversified, much less leveraged and have negotiated these risk issues more soundly," said Timothy Ghriskey, head of Solaris Asset Management.