Goldman Feels the Heat

Though it wasn't a terrible quarter for Goldman Sachs (NYSE: GS  ) , it's become apparent that banking is a terrible industry right now.

Goldman earned $1.81 per share in the third quarter, 70% lower than last year. That's actually a respectable showing -- Goldman didn't lose money! Book value grew 2% during the quarter, the company remains well-capitalized, and if anything, the turmoil in the market might create opportunities for Goldman to swoop in and profit from others' pain. No complaints, right?

That's where the good news ends
Unfortunately, after Bear Stearns' bailout in March and Lehman Brothers' bankruptcy over the weekend, many are starting to wonder whether the stand-alone investment banking model will be able to continue much longer, even for a formidable powerhouse like Goldman.

The current model for stand-alone investment banks like Goldman and Morgan Stanley (NYSE: MS  ) (the last two remaining Wall Street banks) relies on funding operations by borrowing from outside investors. This works wonders when the market is willing to lend, but -- as Bear and Lehman have learned -- it can lead to an overnight demise once they choose not to.

The alternative to this is to build your books through a stable base of customer deposits, in the way banks like Bank of America (NYSE: BAC  ) , JPMorgan Chase (NYSE: JPM  ) , and Citigroup (NYSE: C  ) can do. The idea here is that since bank deposits are insured by the FDIC, banks are less susceptible to any exodus of capital that might leave them insolvent.

Of course, these guys march to their own drums
For the time being, Goldman is clearly stating that it has no intention of merging with a deposit-heavy bank. Is that a good idea? It's not the safest bet -- especially if the global financial system continues to unravel -- but my gut tells me that Goldman will change its tune in the next year. If it were to merge with a bank like Wells Fargo (NYSE: WFC  ) or even Washington Mutual (NYSE: WM  ) , its operations would almost certainly be given more credit by global investors, who are currently scared out of their minds.

More on this weekend's historic developments:

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. JPMorgan Chase and Bank of America are Motley Fool Income Investor recommendations. The Fool has a disclosure policy.


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