Investors are bracing for losses as

Goldman Sachs

(GS) - Get Report

and

Morgan Stanley

(MS) - Get Report

prepare to report fourth-quarter earnings this week.

Analysts polled by Thomson Reuters are expecting a loss of $3.50 per share from Goldman when it reports Tuesday, compared to its $7.01 gain last year. It would be Goldman's first-ever money losing quarter since it went public in 1999. They predict Morgan Stanley will lose 37 cents on Wednesday, which would at least be better than its disastrous end to last year, when it lost $3.61 per share.

"It's very possibly been the worst three-month period in the markets since the Great Depression, so it's very, very difficult if you're acting as an intermediary that also holds a large inventory of assets for which there are no buyers," says David Killian, portfolio manager at Valley Forge Advisors in King of Prussia, Penn.

Killian says he will be looking for details on the firms' strategies following their sudden conversion to bank holding company status, which means they are now regulated by the

Federal Reserve

. While the Fed is a much tougher watchdog than the

Securities and Exchange Commission

, it also offers cheaper access to funds and a more explicit government safety net than the giant broker dealers had previously.

Putting themselves under the Fed umbrella was one of several moves Goldman and Morgan Stanley made as an emergency measure in September when their shares were under assault and the firms suddenly found themselves facing the threat of extinction as they lost the confidence of investors and creditors.

Goldman, in particular, will suffer from a selloff in equities, as probably more of its business is dependent on equities than any of its peers, according to one analyst who declines to be identified because he is not authorized to speak with the press. He says low equity prices translate to lower prices in Goldman's private equity and proprietary trading positions. Goldman's investment in Chinese bank

ICBC

, for example, is widely estimated to be down by several hundred million dollars.

Both banks also took a major hit in mid-November, when Treasury Secretary Hank Paulson announced the government would not be buying distressed assets from banks as was originally envisioned under the government's $700 billion Troubled Asset Relief Program, or TARP. The announcement drove prices down across the debt markets.

One positive for the banks is the money they will save on lower

compensation

expenses, as Merrill Lynch analyst Guy Moszkowski pointed out in a recent research report. The top three executives at

Morgan Stanley

and the top seven at Goldman have all said they will forgo bonuses for 2008. The firms will be able to pay other executives less without fearing they will go elsewhere, since both private equity and hedge funds are also struggling.

Goldman and Morgan Stanley will benefit to some extent from fewer competitors, following the bankruptcy of

Lehman Brothers

and the sale of former competitors

Bear Stearns

and

Merrill Lynch

( MER) to

JPMorgan Chase

(JPM) - Get Report

and

Bank of America

(BAC) - Get Report

, respectively. However, they will still face challenges from banks with large investment banking operations, including not only JPMorgan, Bank of America and the struggling

Citigroup

(C) - Get Report

, but also European giants such as

Credit Suisse

(CS) - Get Report

,

Deutsche Bank

(DB) - Get Report

,

UBS

(UBS) - Get Report

and

Barclays

(BCS) - Get Report

.

And they will still have to share the now-meager M&A advisory fee pool with smaller rivals such as

Lazard

(LAZ) - Get Report

and

Evercore

(EVR) - Get Report

that do little if any lending or proprietary trading and so have not suffered nearly as much damage from the credit crisis.