Despite massive equity infusions and shifts to their business models, storied financial firms

Goldman Sachs

(GS) - Get Report


Morgan Stanley

(MS) - Get Report

still have not eased investors' considerable jitters.

As the federal


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

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Four trading days before

Lehman Brothers

filed for Chapter 11 bankruptcy protection, it cost $500,000 to insure against a


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.

Goldman, for example, has been much surer-footed than Citigroup through the crisis. The firm as of Thursday had posted writedowns and credit losses of $4.9 billion, or about 8% of its market capitalization, compared to Citi's $60.8 billion, or 50% of its market cap, according to


. Morgan Stanley has seen writedowns and credit losses of $15.7 billion, and while this is 60% of its market cap, a higher ratio than that of Citi, it does not explain why it should be five times as expensive to insure against a Morgan Stanley default as it is to insure against one by Citi.

"Your point about Citi really struggling and Goldman nearly perfect, at least on a relative basis over the last two years, worked for the last 23 months," says Bob Doll, CIO of equities at BlackRock. "In the last month, the game has changed."

Morgan Stanley

executives were exasperated when the company blew away analyst earnings projections last month, only to watch its shares plummet.

"No one

cares about earnings anymore. It became about survivability, and we get it," says one, who declines to go on the record because

public perception

of the firm is such a delicate issue at the moment that he does not want to be held accountable for affecting it in any way.

Concerns about public perception of their survivability is what forced both Morgan Stanley and Goldman to secure large equity infusions. Goldman got a $5 billion commitment from Warren Buffett's

Berkshire Hathaway

, and Morgan Stanley struck a deal with

Mitsubishi UFJ Financial Group



Those same concerns about survivability made them register with the

Federal Reserve


bank holding companies

. While these moves drove the cost of credit protection lower for both firms, CDS investors clearly still view them as riskier institutions than more traditional banks , even those with large investment banking arms like JPMorgan, Citigroup or

Bank of America

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"It's not like you one day close your doors as a broker and then the next day you're a bank and you have a deposit base," says Dave Hendler, analyst with bond research firm Creditsights. "It takes time to cobble together, grow yourself, buy others, etcetera."

Indeed, Goldman has just $20 billion in deposits, and Morgan Stanley has $36 billion. That compares to $200 billion in deposits for Citigroup -- a number that will grow to about $600 billion once it completes its acquisition of


(WB) - Get Report


Brad Hintz, an analyst with Sanford Bernstein & Co., believes part of the reason CDS protection is so expensive for Morgan Stanley and Goldman may be related to hedge funds offsetting derivatives trades with the firms. This is likely less of an issue for a Citigroup, which presumably does fewer complex hedge fund trades relative to its size.

"It would not be illogical for a hedge fund to say, 'I need to hedge these derivatives because we saw what happened to people who had not hedged their derivatives with Lehman,'" Hintz says. Many hedge funds that had derivatives trades with Lehman are now in the long line of the firm's creditors.

Goldman's and Morgan Stanley's higher leverage, relative to the commercial banks, remains a concern for BlackRock's Doll. He says BlackRock has a small allocation to Goldman, Morgan Stanley and financial companies in general, compared to the indices against which it measures performance.

"We still think it's too soon

to bet on a sector rebound," he says.