Goldman Sachs and Morgan Stanley, the last two remaining major independent Wall Street brokerages, each rebutted suggestions that their days as standalone institutions could be numbered, as they presented investors with lower, but better-than-expected, profits for third quarter.

Goldman Sachs yesterday insisted that its future as an independent brokerage was strong, despite announcing a record 70 per cent fall in profits for the third quarter. It said that a $1.1 billion (£617 million) hit from the credit crunch had combined with weak trading and advisory revenues to drag down profits to $845 million, or $1.81 a share, but it insisted that it did not need funding from the US Federal Reserve, or to be taken over by a financial institution. Analysts had expected the profits to come in at $1.71 a share.

Morgan Stanley, which had been due to report its results today, brought forward its profits announcement to last night, in a bid to calm jittery investors who had sent its shares down by $3.49, or 11 per cent, to $28.70 in normal trading hours. The profit, which equates to $1.32 a share, represented a 3 per cent decline on the year before, but came in well ahead of the consensus analyst forecast of $0.78 a share.

Just as Lloyd Blankfein, Goldman Sachs’ chief executive, had done ten hours earlier, Morgan Stanley’s head insisted that his firm was “well positioned” to weather the storm of negative sentiment afflicting the financial sector. John Mack, chief executive, said: “We have continued to actively reduce our legacy positions and carefully manage our risk, capital and liquidity”. Morgan’s shares jumped by $2.00, or 7 per cent, to $30.70 in after-hours trading.

Goldman Sachs announced a third-quarter profit that was 70 per cent down on the year earlier and 60 per cent below the $2.08 billion profit that it recorded in the second quarter. Shares fell by as much as 12 per cent in morning trading before recovering to end the day off 2 per cent at $133.01.

The shares were also still reacting to Lehman Brothers’ bankruptcy filing on Monday which has made investors wary about the prospects for the remaining independent brokerages. Investor fears were stoked further yesterday as AIG, the world’s biggest insurer, teetered on the brink of collapse.

Mr Blankfein conceded that “this was a challenging quarter as we saw a marked decrease in client activity and declining asset valuations”. However, he insisted that Goldman remained “well-positioned to meet the needs of our clients and identify and act on the right market opportunities”.

David Viniar, the chief financial officer, added that Goldman’s access to financing remained robust. Seeking to calm investors, he said that the group was not interested in doing a deal with a bank, although he refused to rule out the possibility entirely.

He said: “Right now, we think our business model works because our business works. Our performance speaks for itself and will continue to speak for itself,” He added that the problems of Goldman’s competitors were based on investment decisions rather than their business models. Goldman did not need Fed funding and had become more cautious in its attitude to risky investments in the light of recent events.

Analysts said that, although Goldman’s results could have been a lot worse, they were still well down on last year. Dick Bove, at Ladenburg Thalmann, said: “The fact of the matter is $1.81 is not a good number at all. If asset values continue to decline, then Goldman will get hit just the way everyone else has been, and I think that is where the huge risk lies.

Goldman’s profits were hit by a $275 million writedown on so-called leveraged loans, which are used to help to finance private equity buyouts, and a further $500 million hit on residential mortgages and home loan-backed securities. The group wrote down the value of commercial mortgages and related bonds by $325 million. Investment banking revenues fell 40 per cent to $1.29 billion, as the slow-down in mergers and acquisitions cut advisory fees by 56 per cent.

Revenues from Goldman’s trading and principal investments’ division fell 67 per cent to $2.70 billion. This included a 67 per cent drop in its fixed income, currency and commodities business to $1.6 billion and a 50 per cent decrease in equities trading to $1.56 billion. The principal investments division, which makes big private equity-style investments with its own capital, recorded a loss of $453 million, against a $211 million gain the year before.

Asset management revenues were more steady, declining by 6 per cent to $1.13 billion. Group revenues declined by 51 per cent to $6.04 billion.

Goldman by numbers
Third quarter to May 30

Group net earnings (profit)
$845m ($2.08bn the year before)

Group revenues
$6.0bn ($12.3bn)

Total revenues from trading and principal investments
$2.70bn ($8.2bn)

Fixed income, currency and commodity revenues
$1.6bn ($3.1bn)

Equities trading and commissions
$1.5bn ($3.1bn)

Total investment banking revenue
$1.3bn ($2.1bn)

Total capital
(at August 29) $221.97bn

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