Toomre Capital Markets LLC

Real-Time Capital Markets -- Analytics, Visualization, Event Processing, and Intelligence

Estimated Investment Bank Fourth Quarter Earnings??

In light of the UBS announcement about its $10 billion write-down of subprime mortgages and CDO securities, Toomre Capital Markets LLC ("TCM") has been asked what one should expect from this week's fourth quarter earnings reports from Bear Stearns, Goldman Sachs, Lehman Brothers and Morgan Stanley. Clearly, since August 31st 2007 and the end of their respective third-quarter results, the volume of transactions in these investment banks' massive fixed-income sales and trading divisions have slowed as market participants world-wide started to adjust to the subprime mortgage crisis and the credit crunch. However, other than declining top line revenues from customer activity, TCM does not have a clue. Just what is owned on the opaque balance sheets, how the valuation of those assets have changed during the credit market debacle and what the proprietary trading desks have done is relatively unknown. In short, the results are a crap-shot and there is high potential for more negative surprises.

On Monday December 10th 2007, Goldman Sachs analyst William Toanona reduced his earnings estimates for Goldman's three competitors: Bear Stearns, Lehman Brothers and Morgan Stanley. According to this Businessweek report, Tanona lowered his estimate on Bear Stearns to a loss of $2.25 per share from a previous estimate for a loss of $1.60 per share; he reduced his Lehman Brothers estimate to $1.35 per share, down from his previous estimate of $1.85 per share; and he cut his fiscal fourth-quarter earnings estimate for Morgan Stanley to a loss of 25 cents per share from a previous estimate of earnings of 32 cents per share. Apparently, Goldman Sach's new estimates for Lehman and Bear Stearns are below the expectations of analysts polled by Thomson Financial.

"November appears to have been a very challenging environment, rivaling the August timeframe," Tanona wrote. "The credit markets were particularly challenging as liquidity dried up, spreads widened and underwriting activity dropped dramatically."

Toomre Capital Markets LLC wonders what insight these investment banking firms will give to other ticking mortgage "time-bombs" such as home equity loans, option ARMs and the Alt-A mortgage sector. With liquidity virtually non-existent, spreads widening significantly and underwriting activity virtually stagnant, TCM wonders what light the various investment bank managements will provide about their earnings outlook for 2008. With Wells Fargo taking its write down on a prime home-equity loan portfolio and UBS announcing another $10 billion dollars in subprime and CDO write-downs, one probably should take any earnings guidance with a healthy dose suspicion. The next few days certainly should be interesting and quite volatile!!!