Investment banks losing their mojo

A changing of the guard is underway on Wall Street. The historic market tumult has shifted the balance of power away from risk-taking investment banks to stodgier, capital-rich commercial banks.

After this week's collapse of Lehman Bros. leh and the purchase of Merrill Lynch mer by Bank of America bac, some analysts say pure-play investment banks' tenure on the top of Wall Street's power pyramid may be nearly over. They also say the remaining firms might need partners to survive.

Only two major investment banks are left: Goldman Sachs gs and Morgan Stanley ms. Both reported quarterly profits Tuesday, defended their business models and said they could survive solo.

Still, the emerging powerhouses are commercial banks that have gobbled up ex-Wall Street titans weakened by the credit crunch. The new model? Bank of America and Merrill, and JPMorgan Chase's jpm marriage to Bear Stearns. "A shift is underway towards a more conservative approach to running financial companies," says John Jay, senior analyst at Aite Group.

The recent turbulence highlights how commercial banks, with their relatively stable base of deposits, have a big advantage over investment banks, which rely on short-term and fleeting sources of cash, says Steve Thel, securities professor at Fordham law school. Bank deposits provide traditional banks with stable, low-cost capital that improves their odds of surviving when cash is hard to come by.

Manny Weintraub, founder of Integre Advisors, says the "business model of a brokerage firm is broken" and runs on the stocks of the survivors can't be ruled out.

There's a growing sense that it will be harder for investment banks to make the kind of money they have made in the past. Business may be less robust as investors burned by the blowup of complex real estate securities created by Wall Street seek a less-risky approach to making money.

Tuesday, Goldman reported third-quarter earnings fell 70%. Revenue was down in most businesses. Still, Goldman had net income of $845 million, or $1.81 a share, topping lowered estimates. "It was the most challenging quarter since we went public in 1999," Chief Financial Officer David Viniar said in a conference call.

"Goldman's aura of invincibility was damaged," says Celent analyst Isabel Schauerte.