Wall Street in no mood to call off party despite $84-bn write-down

NEW YORK: Even after the $8.4 billion writedown for bad debts at Merrill Lynch, the unprecedented ouster of three chief executives within five months and the elimination of $84 billion of market value at the five largest securities firms, Wall Street still is poised to report its second-most profitable year.

And 2008 may be better. Amid the subprime gloom, analysts estimate Goldman Sachs, Merrill, Morgan Stanley, Lehman Brothers and Bear Stearns will earn a combined $28 billion this year, down 8.3% from the record $30.6 billion in 2006, according to a survey. Analysts currently estimate the firms’ net income will reach $32 billion in 2008.

Goldman and Lehman will report their highest earnings ever this year, while profits will drop 42% at Merrill, 34% at Bear Stearns and 6% at Morgan Stanley. Goldman, led by CEO Lloyd Blankfein, will earn a Wall Street record $11 billion this year and then $10.5 billion in fiscal 2008, analysts estimate.

Goldman and Lehman made more than half of their third-quarter revenue outside the US, benefiting from faster growth in Asia and Europe. Bank of America relies on the US for more than 80% of its revenue.

Bank of America, JPMorgan Chase and Wachovia reported November 9 fourth-quarter results will be affected by difficult credit markets. Wachovia said mortgage related losses and reserves for bad loans may total $1.7 billion this quarter. Bank of America said in a filing with the US Securities and Exchange Commission that ‘significant dislocations’ in the debt markets will ‘adversely impact’ the fourth quarter. JPMorgan said ‘further markdowns’ for loans used to finance leveraged buyouts may occur “if market conditions worsen.” Merrill has plummeted 43% this year in NYSE trading, Bear Stearns has slumped 40%, Lehman has dropped 26% and Morgan Stanley has declined 20%. Goldman shares have advanced 6%.

The slide began after UBS shut its Dillon Read Capital Management hedge fund unit in May because of losses on subprime mortgages. A month later, two hedge funds managed by Bear Stearns started receiving margin calls from lenders after bets on mortgage bonds and collateralised debt obligations, bonds backed by pools of other debt, went sour. Wall Street executives remained sanguine.

UBS ousted Peter Wuffli, 50, after almost four years in the job. Stanley O’Neal’s 21-year career at Merrill ended last month when he lost the confidence of investors and the board of directors by disclosing writedowns that were almost double the firm’s forecast of just three weeks earlier.

This led to a $2.2 billion third-quarter loss, the worst in Merrill’s history. Chuck Prince stepped down November 4 after the bank warned of as much as $11 billion of additional writedowns on mortgages and related securities, on top of more than $6 billion of charges reported for the third quarter.

Morgan Stanley joined Merrill, Citigroup and UBS in booking losses on subprime mortgage-related assets. On November 7, the firm reported a loss of $3.7 billion in the two months ended October 31.

Prices for securities dependant on home loans to risky borrowers sank further than traders expected, cutting fourth quarter earnings by $2.5 billion, Morgan Stanley said. The tumult followed the most profitable first half in Wall Street, boosted by record merger and acquisitions, high-yield financing, commodities trading and stock market gains.

Still, the business mix at the biggest securities firms is diversified enough that earnings should be strong in 2008, analysts estimate. Merrill’s net income will climb about 60% next year say analysts.Merrill was hired last week by Visa International to help raise as much as $10 billion. “The IPO might send a signal to the market that it’s not all going to hell in a hand basket,” said Marc Pado, chief market strategist at Cantor Fitzgerald in San Francisco.