Shares in Morgan Stanley and Goldman Sachs, the brokerages that recently turned themselves into bank holding companies, dived after the Moody’s ratings agency said that it might cut their credit ratings.

Morgan Stanley’s shares tumbled by 41.45 per cent at one stage, before closing 22 per cent down at $9.68, and Goldman’s ended the day 12 per cent down at $88.80 as Moody’s said that the worsening financial crisis threatened to cut their profits, reduce investor confidence and send their stock down even further.

“An extended downturn in global capital market activity will reduce Morgan Stanley’s revenue and profit potential in 2009 and perhaps beyond this period,” Moody’s said. “Investor, counterparty and customer confidence is critical to the funding and profit generation of the firm, especially in a hostile market environment.”

Doubts about whether Mitsubishi UFJ, the Japanese bank, would follow through on its planned $9 billion (£5.3 billion) capital injection in Morgan Stanley also hit the group’s shares. Even if Mitsubishi does complete the cash infusion, as both parties have insisted will happen next Tuesday, investors are nervous that $9 billion might not be enough to help Morgan Stanley ride out the crisis.

Egan Jones Ratings estimated that Morgan Stanley probably needs to raise as much as $60 billion to restore confidence among investors and customers.

That estimate was double the amount Egan Jones forecast only a day earlier, as investor confidence continued to evaporate in line with the declining stock markets.

Yesterday’s share-price decline represented the fifth consecutive daily drop for Morgan and left it down by about 60 per cent on the week.

Warren Buffett, who invested $5 billion in Goldman Sachs on September 24, is far less likely to make a profit on a side deal as a result of the group’s recent declines. In the deal, Mr Buffett has warrants to buy up to $5 billion of new Goldman shares, at $115 a share, at any time in the next five years.

David Trone, an analyst for Fox-Pitt Kelton, said: “Morgan Stanley shares have been under extraordinary pressure of late, for no apparent fundamental reason, as we estimate liquidity, the balance sheet and long-term earnings prospects are sound.

However, as we’ve seen with Bear Stearns and Lehman, once the fear has infected the story, it is tough to shake.”

Bear Stearns was sold to JPMorgan Chase in a fire sale in March as the brokerage teetered on the brink of bankruptcy. Lehman filed for Chapter 11 bankruptcy protection last month.

Noting Morgan Stanley’s statement that it had very little exposure to the approximately $360 billion insurance claims bill that the underwriters of Lehman Brothers debt are facing, Richard Bove, an analyst for Ladenburg Thalmann, said that “confidence is still the key variable in this story as it was in Bear Stearns and Lehman”.

Jon Fisher, a portfolio manager at Fifth Third Asset Management in Minneapolis, said: “The Mitsubishi transaction hasn’t closed yet. I think there’s a legitimate concern that that deal doesn’t go through.”

Both Goldman Sachs and Morgan Stanley have been hit as a ban on the short-selling of US financial shares was lifted this week. Goldman has raised $10 billion, including $5 billion from Mr Buffett, the world’s richest man, to bolster its balance sheet. In that transaction, Mr Buffett acquired preference shares that pay an interest rate of 10 per cent.

“Goldman’s commitment to controls is noteworthy,” Peter Nerby, an analyst at Moody’s, said in a statement.

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