Goldman, Morgan Stanley profits fall

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New York, Sep 17: The two largest US investment banks, Goldman Sachs Group Inc and Morgan Stanley, reported lower quarterly profits, but beat expectations on Tuesday even as the worst market slump in decades rattled Wall Street.

Goldman Sachs said its third-quarter earnings plunged 70% on weaker-than-expected revenues, knocking its shares to nearly three-year lows.

Smaller rival Morgan Stanley, which reported after the close of North American markets, trounced expectations partly on the back of strong equity trading results.

Morgan’s earnings fell less than 3% even as the year-old credit crunch slowed deal activity and created one of the toughest trading environments in decades.

Between Goldman Sachs and Morgan Stanley, we are getting some modest positive news in what has been an otherwise dark five-day period, said Keith Wirtz, president and chief investment officer of Fifth Third Asset Management.

After closing down 11%, Morgan Stanley shares gave up after-hours gains of nearly 9% to trade around their close of $28.70.

With Lehman Brothers Holdings Inc filing for bankruptcy and Merrill Lynch & Co Inc rushing into the arms of Bank of America Corp in the last couple of days, questions have grown about the viability of the financial sector as it stands.

But Morgan Stanley chief financial officer Colm Kelleher said he remains confident in the broker-dealer model and dismissed the need to merge with a deposit-taking bank. “I’m very confident about the business model. I’m clearly cautious about the markets,” he said.

On a conference call with investors, Kelleher said he hoped the results would serve as a building block in a bridge to rebuilding confidence in this market.

Things are frankly getting out of hand, he said. Ridiculous rumors are being repeated, some of which if I wrote down today and re-read tomorrow, I’d probably think I was dreaming.

The investment bank said $2.7 billion in revenue from equity sales and trading included record results in prime brokerage. Results also included a $745-million pre-tax gain related to the follow-on offering of index company MSCI.

“This is great news for the whole financial sector,” said Marshall Front, chairman at Front Barnett Associates. “I think the key to this whole thing was that they looked better than Goldman Sachs’ earnings earlier in the day.”

Goldman Sachs’ results were marked by sharply lower banking, trading and investment results. It was the investment bank’s biggest earnings decline since it went public in 1999.

Goldman beat profit expectations, despite $1.1 billion in write-downs and losses from principal investments.