How do you defend not just a business, but a business model? Goldman Sachs and Morgan Stanley – the two remaining pure-play investment banks – made their case on Tuesday. Shares in Goldman Sachs fell just 2 per cent after the bank revealed a year-on-year fall in third-quarter net income of 70 per cent. But another day’s battering left Morgan Stanley’s shares down almost 11 per cent, while the spreads charged to insure against the bank’s default widened to almost 800bp. It rushed out third-quarter earnings as the market closed. Its net income, down just 3 per cent, was flattered by a gain on the sale of part of its stake in MSCI. But, at least, the put-upon broker-dealers both posted a profit. Will that be enough?

The grim backdrop for investment banks was, of course, reflected in both sets of numbers. Goldman’s investment bank revenues dropped 23 per cent from the second quarter as clients lost their appetite for deal-making. Its peer saw falls on last year, but advisory and underwriting business improved on a quiet second quarter, helped by capital-constrained European rivals resorting to rights issues. In fact, Morgan Stanley managed to outshine its vaunted rival in other areas also, boasting a decent quarter in proprietary trading in equities as some of Goldman’s bets went awry.

Both investment banks maintain that, despite the market’s storm, they do not need to seek the ballast of retail deposits. They point to ample liquid assets, high and rising Tier 1 capital ratios – no matter how degraded that measure – and increased book value per share. With the Federal Reserve’s expanded funding window supporting the industry, one looming threat to the broker-dealer model may be a heavier regulatory burden – meaning yet more capital, lower leverage and more disclosure. Still, with rivals humbled and pipelines apparently healthy, both should press home their advantage.

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