Updated from 9:40 a.m. EDT

The two biggest names in investment banking continued to earn money at a blistering clip in the second quarter, augmenting their dominance in stock and bond market-making with robust gains in stock underwriting and money management.


Morgan Stanley


, second-quarter earnings doubled from a year ago, rising to $1.8 billion, or $1.10 a share, from $915 million, or 55 cents a share, last year. Analysts had been forecasting earnings of $1.06 a share on revenue of about $6.06 billion, according to Thomson First Call.


Goldman Sachs

(GS) - Get Report

, quarterly earnings surged 71% from a year ago to $1.19 billion, or $2.31 a share, from $695 million, or $1.36 a share. The latest quarter was aided by a gain from the sale of an investment in Japan.

Goldman's net revenue jumped 38% to $5.51 billion. On average, analysts surveyed by Thomson First Call had been forecasting earnings of $1.95 a share on revenue of $4.98 billion in Goldman's May 31 quarter.

In early trading, shares of both Goldman and Morgan Stanley were moving higher. Goldman shares rose 41 cents to $89.20, while Morgan Stanley's stock was up 52 cents, or 1%, to $51.77.

But in the short-term, officials at Morgan Stanley sounded a note of caution about the outlook for Wall Street over the next several months, noting there's uncertainty and hesitancy about the direction of interest rates and the situation in Iraq.

"The underlying economic growth has taken hold pretty much globally,'' Morgan Stanley Chief Financial Officer David Sidwell, said in a media conference call. "In the near-term, there are some concerns that are keeping investors on the sideline.''

So far, however, neither Goldman Sachs nor Morgan Stanley is showing any ill effects from the rise in long-term interest rates -- something many had expected would take a bite out of bond trading revenue. Like

Bear Stearns



Lehman Brothers


, which last week reported healthy second-quarter profits, revenue from bond trading remained robust at Goldman and Morgan Stanley.

Over the past year, Goldman and Morgan Stanley have feasted on revenue from bond and equity trading, a business that consists of making markets for institutional clients and carrying out principal transactions for the firms' own accounts. And both firms continue to take a high level of risk in order to maximize trading revenue, something Wall Street executives say they can more than manage.

At Morgan Stanley, value at risk -- shorthand for the estimated one-day trading loss the firm could conceivably incur -- rose to $72 million in the quarter from $54 million a year ago. The VAR at Goldman Sachs rose to $69 million in the second quarter from $59 million last year.

"We have increased risk and we did that consciously in the quarter,'' Sidwell said. "There has been an increasing trend over the past couple of quarters, but clearly this is a measure that is gong to vary depending on the measure of opportunities.''

Between the two, Goldman counts on trading more. Revenue in the firm's trading unit totaled $3.4 billion in the most recent quarter, up 59% from a year ago but down 10% from the first quarter. By contrast, revenue in Goldman's investment banking unit was $928 million, or 67% from a year ago, while revenue in asset management was $629 million, up 52% from a year ago.

Within Goldman's trading operation, bond, currency and commodity revenue rose 15% from a year ago to $1.89 billion while revenue from stock trading was flat at $1.08 billion. Principal trading revenue swung to $657 million from a negative $44 million last year, reflecting a gain from the sale of a convertible stake in Sumitomo Mitsui Financial.

Regarding the bond, commodity and currency markets, Goldman said: "All major businesses generated strong results in the quarter, although currencies declined from a particularly strong second quarter last year. The business environment was somewhat less favorable compared with the first quarter of 2004 as interest rates increased and credit spreads were volatile."

At first blush, analysts seem to agree with Goldman's assessment. David Trone, a Prudential Equity Group brokerage analyst, said in a research note that Goldman's performance demonstrates that bond-related businesses "are not falling off a cliff."

At Morgan Stanley, net revenue in the firm's institutional securities group rose 47% from a year ago to $3.94 billion. The group includes Morgan Stanley's investment bank and fixed-income trading group.

Earnings at Morgan Stanley would have been even higher if not for a $109 million pretax impairment charge on its aircraft leasing business. The charge reduced earnings by 6 cents a share.

On a percentage basis, investment banking posted the strongest gains at Morgan Stanley. In the quarter, net income from investment banking rose 83% to $983 million. Earnings from proprietary trading also remained strong, coming in at $2 billion, up 24% from a year ago.

The weak link in Morgan Stanley's franchise was its Discover credit card business. The group generated $298 million in earnings, down 1% from a year ago. Net revenue in the credit card services division also declined 1% to $879 million.

Sidwell says second-quarter revenue from Discover were hurt by the launch of a new program to increase use of the credit card.

On the regulatory front,

The Wall Street Journal

reports that both Goldman and Morgan Stanley are close to resolving a lengthy investigation into bubble-era initial public offering abuses.



reports each firm will pay a $40 million to settle the investigation, which has focused on allegations the brokers took kickbacks from big investors seeking higher than normal allocations in hot IPOs.