Bankers Face Grim Truth: Worst Is Yet to Come
NY Times
December 12, 2007

AS the credit crisis sweeps wildly through Wall Street, major investment banks face a grim truth about their already-slumping profits: the worst is yet to come.

Beginning with Lehman Brothers on Thursday, major investment banks and securities firms will begin reporting what are likely to be their weakest quarterly earnings in years.

The results will show how hard the recent turmoil in the financial markets continues to hit the even the mightiest Wall Street banks, and could cast doubt over the future of several chief executives. Multibillion-dollar write-offs have already prompted Merrill Lynch and Citigroup to replace their chief executives.

Some Wall Street stock analysts — many of whom rarely say sell — in recent weeks have turned bearish on their own industry. One analyst after another has cut earnings estimates for Wall Street banks, citing continued concern about the widening mortgage crisis. Some have placed sell recommendations on the shares of Bear Stearns, Citigroup and Morgan Stanley.

Lehman on Thursday is likely to report that net income fell 16 percent in its fiscal fourth quarter from the year-earlier period. In a research report last week, Michael Hecht, an analyst at Bank of America, lowered his estimate of earnings to $1.32 a share from $1.52.

"While we don't expect any of the mega markdowns we have been seeing from a number of Lehman's peers, we don't expect them to slide by unharmed either," Mr. Hecht wrote in a note to investors.

Bear Stearns and Morgan Stanley, both of which report results next week, are likely to sink into the red, however. Morgan Stanley is expected to report a quarterly loss of 38 cents a share, according to analysts surveyed by Bloomberg. Bear Stearns is expected to report a loss of $1.75 a share. Some analysts and money managers have called into question the tenures of James E. Cayne at Bear Stearns and John J. Mack at Morgan Stanley after both firms announced billions of dollars in write-downs.

Even Goldman Sachs, which has avoided the large write-downs on subprime-related investments that have harmed many of its rivals, is likely to disclose a drop in profit. Goldman reported a 79 percent surge in third-quarter earnings because of an aggressive bet against subprime mortgages. Its chief executive, Lloyd C. Blankfein, said at the time that he did not expect to announce a write-down in those assets' values.

Even so, Goldman is unlikely to be immune to continued weakness in the mortgage trading environment. Guy Moszkowski, an analyst at Merrill, cut his 2008 earnings estimate for the firm last week and downgraded his rating on Goldman stock to neutral. Mr. Mozkowski also cut his earnings estimates for Bear, Lehman and Citigroup.

Michael Mayo of Deutsche Bank similarly lowered his fourth-quarter profit estimates for Goldman and Lehman on Dec. 3. "The main issue is a very difficult fixed-income market in November, possibly one of the worst in years," Mr. Mayo wrote in a research note.

His sentiments were echoed by Prashant Bhatia of Citigroup and Roger A. Freeman of Lehman. Mr. Bhatia predicted that Merrill would write down an additional $4.5 billion and lowered his fourth-quarter forecasts for Merrill, Goldman, Morgan Stanley and Lehman. Mr. Freeman cut his estimates of investment banks' 2008 earnings, citing November's market turmoil.

Merrill Lynch and the nation's three biggest banks, Bank of America, Citigroup and JPMorgan Chase, will report their final results for 2007 in January.

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