Moody’s Investors Service placed the long-term debt ratings of Morgan Stanley on review for downgrade.

It also affirmed its ratings on Goldman Sachs, but moved to a negative outlook, amid a general concern about the profit prospects for the investment banking business in the next couple of years.

The rating agency said that its review of Morgan Stanley for possible downgrade is based upon its expectation that an extended downturn in global capital market activity will reduce the firm’s revenue and profit potential in 2009, and perhaps beyond this period.

In addition to the depressed market environment, Morgan Stanley will need to adapt the firm’s business activities and balance sheet to operate in a bank holding company structure, it says. This could limit profit opportunities for Morgan Stanley, though the firm’s risk profile could be lowered, thus mitigating this concern, it ads.

Investor, counterparty and customer confidence is critical to the funding and profit generation of the firm, especially in a hostile market environment, Moody’s says. During its review, it will focus on the success of the actions that management takes to alleviate these confidence pressures and maintain customer franchises, while retaining key producers in a difficult environment.

Moody’s also said that, in its view, Morgan Stanley’s recent performance has been relatively solid, it has acted to solidify its capital base, it has maintained a good liquidity profile, and it has benefited from a level of systemic support that is factored into the rating. The benefits of these attributes relative to the risks will be considered during the ratings review.

Moody’s adds that it views the closing of the Mitsubishi-UFJ capital injection as critical to maintaining current rating levels in light of the more challenging business conditions for wholesale investment banks. It also said that recent actions by regulators during the credit crisis raise questions as to the level and certainty of support that firms such as Morgan Stanley would receive in market crises.

At the same time, Moody’s assigned a negative outlook to the long-term ratings of Goldman Sachs, explaining that the move reflects Moody’s expectation of an extended downturn in capital market activity, and the fact that Goldman is also converting into a bank holding company.

Goldman Sachs long-term ratings remain anchored on superior performance, proven risk management discipline, the reduction of leverage, a conservative liquidity profile, as well as a level of systemic support that is factored into the rating, it said.

Moody’s cautioned that because Goldman will likely maintain its entrepreneurial culture and position as a major participant in global capital markets, the firm will take periodic concentrated risks, including those, which can be illiquid and capable of quickly altering its risk profile. The credit crisis of the past year has reduced the tolerance of market participants for real or perceived position concentrations. “Negative surprises, or even the prospect of a surprise, can erode confidence – even if a firm has sufficient liquidity or capital to absorb a loss,” noted Peter Nerby, a Moody’s senior vice president.

Moody’s noted that Goldman Sachs has moved nimbly during this extended crisis to reduce its legacy leveraged loan positions and balance sheet leverage. And, it said that the firm has a conservative and comprehensive approach to managing liquidity risk and a strong liquidity profile. It added that Goldman Sachs will need to maintain the granularity and velocity of its balance sheet near current levels in order to preserve its current rating levels.