MICHELE NORRIS, host:
From NPR News, this is All Things Considered. I'm Michele Norris. If you've been watching the markets this week, you're probably dizzy. Today, stocks soared on news that the Bush administration is considering a more sweeping approach to the financial crisis. The major indexes were up nearly four percent. The euphoria was strong enough to help Morgan Stanley and Goldman Sachs avoid a ninth straight day of losses. Still, a lot of people are worrying about the fate of Wall Street's last two independent investment banks, as NPR's Jim Zarroli reports.
JIM ZARROLI: This week, the rip currents of Wall Street pulled under both Merrill Lynch and Lehman Brothers, two of the best-known investment banks in the world. When that happened, Morgan Stanley, one of the others, tried to persuade investors it was different. The company made a solid profit this quarter. Unlike Lehman, it had tried to peel off its bad mortgage debt early on. But in a conference call, Chief Financial Officer Colm Kelleher was frank about the challenges the company faces.
Mr. COLM KELLEHER (Chief Financial Officer, Morgan Stanley): What we are seeing is unprecedented in terms of turmoil in the financial services industry.
ZARROLI: By day's end, shares of Morgan Stanley were falling and so were those of Goldman Sachs, the bluest of blue-chip Wall Street names. And a source confirmed that Morgan is in talks to find a buyer. Among the people it's talking to, the source said, is the banking giant Wachovia. In some ways, the problems faced by Morgan Stanley and Goldman Sachs are similar to those faced by other investment banks. Bob Litan of The Brookings Institution says, to operate, these banks rely heavily on borrowed money. Litan says much of the money is borrowed at short-term rates, so they're having to constantly go into the credit markets for new loans.
Dr. ROBERT LITAN (Senior Fellow, Economic Studies, The Brookings Institution): Short-term lending is cheap. Up to now, it's been a cheaper way to operate. And of course they use a lot of this borrowed money to trade, because the way you make money on trades is to borrow lots of money. And even though you make a little bit of money on a trade, if you can magnify it with leverage, you can make a lot of money. And that's what investment banks do.
ZARROLI: Litan says Goldman and Morgan Stanley have lost money in the mortgage mess. Still, he says, they recognized the problems they faced early on and took steps to reduce their debt. And, he says, their losses simply aren't in the same league as Bear Stearns and Lehman Brothers.
Dr. LITAN: The situations are not comparable. But in a climate of fear, it doesn't seem to be making much difference.
ZARROLI: And that's really the rub right now. The hedge funds and banks and institutional investors that usually lend Morgan and Goldman money are so scared right now about economic conditions that they have turned off their spickets. David Easthope of the research firm Celent says in this kind of environment it's unclear whether even Goldman Sachs can survive.
Mr. DAVID EASTHOPE (Senior Analyst, Celent): The question is really about the business model. Can these organizations continue to operate as standalone businesses? And that's really what's happening today, is people are weighing in on that, and they're weighing in the market by selling their stocks.
ZARROLI: Easthope says Goldman and Morgan Stanley would love to survive as standalone entities, but time is running out. One possible solution emerged this afternoon. There were reports that congressional leaders were again considering the formation of a credit facility to absorb some of the bad mortgage debt investors hold. It would be something similar to the Resolution Trust Corporation which helped end the savings and loan crisis of the late '80s and early '90s. And a lot of people increasingly say it's the best way out of the current economic crisis. That helped push shares of Goldman and Morgan Stanley as well as other big financial companies back up. But their fate very much remains in the balance. Jim Zarroli, NPR News, New York. Transcript provided by NPR, Copyright NPR.
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