Bear Stearns melted down in March and has disappeared inside JPMorgan Chase; Merrill Lynch absorbed more than US$40 billion (S$57 billion) in write-downs and rushed into the arms of Bank of America; and Lehman Brothers is being sold for scrap after it filed for bankruptcy on Monday.
Now investors and analysts worry whether even the largest securities firms, Goldman Sachs 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. I think that's an increasingly reasonable question to ask,"said fund manager Les Satlow at Cabot Money Management in Massachusetts, which manages about US$500 million.
That uncertainty was evident 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, too, will be under pressure to show its house is in order when it reports results tomorrow.
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 gunslingers are gone," said Mr 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.
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. They also have done better jobs spreading bets across markets and countries.
The surviving firms are also likely to gain more business with the competition thinning.
That said, even successful investment banks may take another look at joining forces with a commercial bank to gain access to deposits, a more reliable funding source in bad times.
Said Mr Ken Lewis, Bank of America's chief executive: "For seven years, I've said that the commercial banks would eventually own the investment banks because of funding issues. The golden era of investment banking is over." -Reuters
