Goldman, Morgan Still Fighting Investor Fear

Despite massive equity infusions and shifts to their business models, storied financial firms Goldman Sachs (GS) and Morgan Stanley (MS) still have not eased investors' considerable jitters.

As the federal bailout plan to buy up $700 billion in assets clogging bank balance sheets and global credit markets hangs in limbo, former investment banks like Goldman and Morgan continue to battle the perception that they are too heavily dependent on leverage and do not have enough capital on reserve.

The Street's fear is best measured by credit default swaps--unregulated, privately traded securities that insure debt holders against default by large institutions such as companies and countries. Last Friday, as the House of Representatives was cobbling together a version of the bailout bill it would reject on Monday, it cost $2.6 million to insure $10 million worth of five-year Morgan Stanley debt, according to the firm. On Thursday, it cost $440,000 to insure against comparable Goldman Sachs debt, according to Phoenix Partners Group.

By contrast, it cost less than $300,000 to insure debt of most large banks, including JPMorgan Chase (JPM) and Citigroup (C).

Four trading days before Lehman Brothers filed for Chapter 11 bankruptcy protection, it cost $500,000 to insure against a default of that firm.

The cost to insure the firms' debt holders against default has declined some since last week -- on Thursday it cost $1.575 million to insure $10 million of Morgan Stanley debt. Yet it is still surprising in some ways that the credit default swaps market penalizes Goldman and Morgan Stanley so heavily.