Goldman and Morgan Stanley on the ropes

The last two independent investment banks on Wall Street were today engulfed by the banking crisis.

Morgan Stanley is being forced into a desperate merger to stay afloat. Goldman Sachs is also on the rack, having seen 14 per cent wiped off its share price last night.

At one stage, Goldman's share price had dropped more than a fifth. Analysts said it may also have to consider a merger and will anxiously be watching the markets over the next 48 hours.

The Wall Street Journal today said that confidence in the two banks - which have European headquarters in London and between them employ 10,000 high-paid workers here - had "withered" in just 24 hours.

Morgan Stanley, whose shares plunged 24 per cent last night and were at one stage down as much as 44 per cent yesterday, has held preliminary merger talks with Wachovia, a troubled US regional bank.

Other banks are also thought to have been approached as Morgan Stanley's shares finished trading yesterday at $21.75, down $6.95.

The New York Times said that John Mack, Morgan Stanley's chief executive, has entered discussions with "several other banks".

The merger talks are said to be preliminary and a deal may not emerge. Morgan Stanley's possible demise follows a $3.6 billion loss posted in the fourth quarter of last year.

If it were to merge, that would leave Goldman Sachs as the last remaining independent investment bank on Wall Street. But even Goldman is not immune from the effects of the banking crisis and was forced yesterday to rebuff rumours it was desperately seeking an investment of capital.

Earlier this week, Goldman revealed a 70 per cent drop in third quarter profits to $845 million (£465 million) - its worst fall since it went public nine years ago. Chairman Lloyd Blankfein tried to reassure investors that even in these challenging times the bank had done well.

His words of calm were not helped by one unnamed Goldman's employee telling the Wall Street Journal: "I've lost more than half my net worth in a month." Its shares fell by $18.51 to $114.50 at the end of trading yesterday.

Goldman is unusual among its peers in that staff or former staff still own the vast majority of the shares. It floated in 1999 and 48 per cent of the shares are held in its partnership pool, 22 per cent are held by employees who are not partners, and another 18 per cent by former partners. That means any merger undertaken by Goldman will have to be agreed by its staff.

The assault on Goldman and Morgan Stanley was largely unexpected. Goldman, especially, was thought to have seen the credit crunch crisis coming and has boasted about a superior performance.

Mr Mack believes his bank has become the victim of short selling. Yesterday, he sent a memo to Morgan Stanley employees which read: "What's happening out there? It's very clear to me - we're in the midst of a market controlled by fear and rumours and short-sellers are driving our stock down."

Chinese investors, unaffected by the sub-prime meltdown and awash with cash, are also said to be considering a stake in Morgan Stanley.