A few months ago the prospect of Goldman Sachs approaching Citigroup to discuss a merger would have been unthinkable — Goldman appeared to be the one Wall Street firm immune to a credit crunch that had saddled Citigroup with tens of billions of dollars of losses.

But on September 22 Goldman's chief executive placed a call to his opposite number at Citigroup to discuss a tie-up. Vikram Pandit, Citigroup's chief executive, rejected Lloyd Blankfein's proposal immediately.

With Bear Stearns gone and Lehman Brothers a busted flush, the febrile atmosphere in the markets produced extraordinary turbulence for standalone investment banks. It was enough to prompt the Federal Reserve, which became Goldman's regulator on September 21, after Goldman's conversion from a securities firm to a commercial bank, to ask Mr Blankfein to pick up the phone to Mr Pandit.

Although accounts vary about which party the Fed thought would be the main beneficiary of the deal, in an environment where retail deposits are king, Goldman would have had access to hundreds of billions of dollars of account holders' cash at a time when money is a scarce commodity. Citigroup would have gained a financial brand with the clout to boost its share of the investment banking market. Goldman is understood to have been in two minds about a deal with a huge organisation such as Citigroup, which one executive said would have been “like taking on the National Health Service”.

By the time Mr Blankfein called Mr Pandit, Goldman was on the verge of raising $10 billion, half from Warren Buffett from the sale of new shares. Goldman's cash position has been bolstered this month, by a further $10 billion injection, this time from the US Government, as part of its $250 billion recapitalisation of the banks.

Goldman Sachs' revered business model is under increasing scrutiny. As one fund manager with ties to the bank said: “Goldman is broken. It used to make huge profits from leveraging up at 30 to one, but it won't be doing that any more. People at Goldman are very concerned about their future ability to generate those sorts of profits. But there is nowhere for them to go.”

That is a view shared by some other market participants. Pete Najarian, an options trader in New York, said: “Some of the shine is definitely off Goldman Sachs. People expect Goldman Sachs to be different from everybody else but now they are proving to be no different. They have fared much better than most, but they are having to make the same decisions as other people now, showing a few chinks in their armour.”

Adam Compton, an analyst at GMT Capital, added: “Goldman Sachs was the best house, but it was in a really bad neighbourhood. It did better than everybody else, but was hit by a business model problem.”

In the wake of the Lehman Brothers' demise, investors feared that these highly leveraged investment banks would be unable to secure the finance they needed to run their operations.

Not that Goldman Sachs' staff are in the business of letting on that their future may not be so rosy. According to one banker at a rival firm, Goldman staff “appear as cocksure and arrogant as ever and they would be even if the world were about to end”.

However, since becoming a commercial bank, Goldman has announced a 70 per cent decline in third-quarter profits, in what Mr Blankfein admitted was a “challenging quarter”, and a plan to cut 3,300 jobs, or 10 per cent, of its global workforce.

Furthermore, Mr Najarian said that the terms Goldman offered Mr Buffett to invest in it were regarded as so desirable that it made the bank look a bit desperate. It is understood that HSBC was also contacted about becoming an investor before the agreed share sale to Mr Buffett.

Some investors also question what the credit crunch means for the sometimes fractious relationship between the bank's principal investment business, which invests from its own balance sheet, and its advisory arm. After years in the shadows, investment banks' advisory arms are in the ascendancy as banks are thrown back on traditional client-facing work.

Rival banks claim that Goldman, which advised its client Bradford & Bingley to accept a bid from TPG, the private equity firm, that was later pulled, wanted to invest alongside TPG on later banking deals. Goldman has always denied a conflict.

Shares in Goldman Sachs, which stood at $200 in April and fell to $88.30 on October 10, declined by $7.52, or 7.49 per cent, to $92.88 at the close in New York.

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