Lehman Brothers

It's getting lonely on Wall St. 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 yesterday.

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 financial foundations on which investment banks are built.

"If you accept that the broker-dealer model is broken - for now at least - it does reasonably lead you to question whether Goldman Sachs and Morgan Stanley can survive. ... Going out to the market, borrowing money and leveraging up is over. Down the road, they'll all be owned by banks."

Lehman Brothers employee Jennifer Roeder writes a message on a portrait of chief executive Richard Fuld in New York yesterday.

JOSHUA LOTT, REUTERS

Overnight, investors began to pay close attention to leverage, which helps measure 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 roughly $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.

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.

Lehman for example held risky "problem" assets that were 4 times the size of its tangible equity, Schorr said. Morgan Stanley's risk asset ratio was 1.7 times equity and Goldman's ratio was closer to 1.4 times equity, by comparison.