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NEW YORK (Reuters) - For most of the past century, Goldman Sachs was top of the heap among Wall Street's investment banking firms, but its prospects as a heavily regulated bank are not so bright.

After months of fretting about capital and liquidity levels at banks, the market has turned its focus from Goldman's survival prospects to its earnings potential. Investors clearly do not like what they see.

"The days of getting 35 percent (returns) on equity are over -- much of that was achieved with leverage," Mendon Capital President and Chief Investment Officer Anton Schutz told Reuters on Monday.

Brokers and banks, he said, must change their ways. "There is no doubt their balance sheets are seen as weaker. They're trying to get leverage ratios down," Schutz said.

Investors may get some answers when Goldman Chief Executive Lloyd Blankfein speaks at a Merrill Lynch investor conference after the closing bell on Tuesday.

Goldman Sachs Group Inc shares on Monday fell to their lowest levels since 2003 as a growing chorus of analysts forecast plunging markets will produce a fourth-quarter loss -- the firm's first quarterly loss since it went public in 1999.

The stock has plunged 71 percent since reaching a record high last October and is down nearly two-thirds since the end of July. It stood at $72.04 in Tuesday morning trade.

Investors are questioning the firm's ability to retain its famed Midas touch, where an elite army of traders and bankers generated the industry's biggest profits year after year.

The question now is where Goldman will seek new sources of revenue and which businesses it will abandon as it goes through the transition from broker to bank.

"I don't know what Goldman and Morgan Stanley will look like after they re-size," Oppenheimer & Co banking analyst Meredith Whitney said. "I'm agnostic on those names right now. There is a lot they have to go through."

BLANKFEIN SPEAKS

In previous year presentations, Blankfein laid out a blueprint for a firm boldly betting its own capital across markets and companies, taking on more risk than its peers.

He also made no apologies for Goldman's combination of advisory businesses with investment activities. Twelve months ago, he emphasized expansion into fast-growing markets like China and building a private wealth management business.

Since announcing its conversion to a bank and plans to seek a New York state banking charter two months ago, Goldman has been typically mum about its intentions for deposit-gathering and how it would reorganize.

Two months ago, investors made it clear they had little confidence in companies that relied on volatile capital markets for funds needed to run their businesses. Gathering deposits from individuals is now the preferred model.

Banks are expected to maintain higher levels of capital and cash and take on less risk. That has forced Goldman and Morgan to reconsider how to participate in credit intensive businesses such as prime brokerage, deal financing and commodities.

Goldman addressed some of those concerns by selling $5 billion of preferred stock to Warren Buffett's Berkshire Hathaway Inc, $6 billion of stock in a public offering, and $10 billion of preferred stock to the U.S. Treasury.

Last week Goldman fired more than 3,200 employees, or 10 percent of its workforce, the latest in a series of layoffs. And like its peers, it is shedding assets and paying down debt.

That has not stemmed a drumbeat of rumors about the bank's next moves. In recent weeks traders have speculated Goldman will pursue a management buyout or combine with a big bank, perhaps Citigroup.

At the behest of government officials, Blankfein called Citi CEO Vikram Pandit to discuss a potential deal, people familiar with the matter said. Pandit dismissed the idea and the call ended within a minute, the sources said.

For the foreseeable future, debt and mortgage markets remain in disarray. Merger and underwriting activity has slowed to a crawl. Plunging markets are eroding money management fees and generating portfolio losses.

On Tuesday, Fox-Pitt Kelton's David Trone became the latest analyst to forecast a fourth-quarter loss at Goldman. He expects the firm to absorb a $2.7 billion drop in principal investments and a record $2 billion of credit writedowns.