As the credit crisis widens, big brokerage houses expected to post poor results next week. Financial analysts have been warning for quite some time now that this quarter's Wall Street bank earnings are going to be really poor. It will soon become clear how right their predictions were when Bear Stearns Cos., Goldman Sachs Group Inc., Lehman Brothers Holdings Inc. and Morgan Stanley report their first-quarter earnings.
Contrary to some optimistic analysis, the credit crisis has enveloped even more sectors of the financial services industry since the start of the new year. Investors now are second-guessing the value of debt backed by student loans, municipal bonds, commercial real estate and even mortgages issued by Fannie Mae and Freddie Mac. On top of this, the trading of leveraged loans, a popular way for companies with weak credit ratings to finance the high-flying corporate buyouts of recent years, has lost its appeal.
Goldman (GS, Fortune 500), which had largely escaped the subprime mortgage bloodbath of 2007, started the year with analysts predicting first-quarter earnings would come in at $5.64, on average, according to Thomson Financial. Now, the average earnings estimate is $2.59.
Bear's (BSC, Fortune 500) earnings estimate has plummeted to 90 cents, from $2.06. Lehman's (LEH, Fortune 500) estimate shriveled to 72 cents, from $1.62, and Morgan's (MS, Fortune 500) to $1.03 cents, from $1.61.
Bear Stearns -- serious liquidity crisis
Bear Stearns faces a serious liquidity crises. The company secured an emergency loan from rival JPMorgan Chase. The firm posted its quarterly loss of $854 million in 84-year history in December and booted Chief Executive James Cayne soon after.
Goldman and Lehman -- expected to suffer
Late last year, it looked like Lehman and Goldman might escape the mortgage meltdown. While their peers at Citigroup Inc. and Merrill Lynch & Co. suffered their largest quarterly losses ever, Lehman reported profits of $886 million and Goldman earnings of $11.6 billion for the fourth quarter.
But even these giants cannot sidestep an across-the-board credit disaster, said Adam Compton, senior research analyst at RCM Capital Management, a San Francisco-based investment manager. Firms will have to take even greater writedowns on the value of their holdings now that defaults are spreading to prime borrowers with good credit backgrounds.
Lehman has already taken steps to streamline its operations. They plan to eliminate an additional 5% of its workforce (1400 jobs).
Morgan Stanley -- in a better position?
Morgan, meanwhile, is expected to take a $1.2 billion writedown, as it takes more lumps from leveraged loans and mortgages. But some analysts see Morgan faring better than its peers this quarter because it was more aggressive in writing down its subprime portfolio last quarter and its commercial mortgage-backed securities holdings are spread out internationally. Morgan last year took $10.3 billion in writedowns and reported its first-ever quarterly loss, of $3.6 billion, in December.
Source: CNN Money