Even though some of the big investment banks are raking in profits, a new report from Moody’s questions whether “reliable repairs” have been made to these companies’ business models. The ratings agency then runs through some of the key ratios it will be following to gauge the health of the wholesale investment banking units at the largest financial firms.
One of the simplest metrics, gross leverage, is also the most telling. The scale of deleveraging at the pure-play investment banks is striking, as is the fact that high-flying Goldman Sachs and Morgan Stanley (the green line in the chart) were once practically indistinguishable from credit crunch casualties Bear Stearns, Lehman Brothers and Merrill Lynch (yellow line) as far as gross leverage was concerned.
Among the investment banking survivors, “few managers have been willing to reset promises to shareholders for a less free-wheeling environment,” Moody’s warns. “As a result, some firms may be tempted to again increase risk and leverage to meet shareholder demands as the crisis recedes.”