NEW YORK (Reuters) - Anxious investors continued to hack away at Morgan Stanley and Goldman Sachs Group Inc Wednesday, sending the two largest investment banks’ shares lower and boosting default-insurance prices higher amid lingering worries about their ability to survive.
In early trade, shares of Morgan Stanley sank 13 percent to their lowest level in a decade, while Goldman Sachs fell 8 percent to a three-year low. So far this year, Goldman shares have fallen by 43 percent and Morgan’s have lost half their value.
More distressing was the rise in the cost of protecting against a default in debt issued by the banks.
The cost of protecting $10 million of Morgan debt against default for five years rose to $796,000 a year, up $40,000, according to CMA DataVision. Insurance policies on the debt, known as credit default swaps, were trading as though the firm were rated deep in junk territory at “B2” by Moody’s, or 10 steps below its actual rating of “A1.”
The cost of Goldman debt default insurance rose to $462,000 a year, up $16,000, trading as if the firm were rated “Ba3,” nine steps below its actual “Aa3” rating at Moody’s.
The two remaining major Wall Street investment banks posted better-than-expected third-quarter results on Tuesday, but the news was not enough to slow the spreading fire.
“The credit crunch and credit contraction is intensifying,” said Peter Boockvar, equity strategist at Miller Tabak & Co in New York. “The action in Morgan Stanley in light of what was better-than-expected numbers last night is disconcerting.”
Morgan Stanley on Tuesday rushed to release its quarterly results after investors pushed its shares down 11 percent and led to widening swap spreads. Morgan out-earned the larger Goldman, which also exceeded analysts’ expectations.
Executives from both firms insisted their businesses remain vibrant and have performed well in unprecedented turmoil. Both argued they do not want or need to merge with a commercial bank.
Yet contraction in the capital markets has convinced some analysts that investment banks need to combine with big deposit-rich banks so they can tap pools of deposits for funding when debt and stock markets grow jittery.
Yet the same panic that pushed Lehman Brothers Holdings Inc into bankruptcy and prompted Merrill Lynch & Co to seek a merger with Bank of America Corp continues to weigh on Goldman and Morgan Stanley.
Additional reporting by Dena Aubin and Ellis Mnyandu; editing by John Wallace