The analysts have been preparing us for months. This quarter's Wall Street bank earnings are going to be bad - real bad.
Bear Stearns is in the center of the bulls eye. On Friday, the brokerage firm said a serious liquidity crisis had prompted it to secure an emergency loan from rival JPMorgan Chase. Bear's stock plummeted 47% and ended the week imperiled.
Far from winding down, as some of the optimistic had predicted last year, the credit crisis has engulfed even more sectors of the financial services industry since the start of 2008. 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.
As the contagion spread, analysts started furiously lowering earnings expectations. 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.
The weak overall market is not making it any easier for the Wall Street firms. Mergers and initial public offerings have dried up, eliminating a source of lucrative fees the companies could have used as a buffer against loan losses. Also, last year's strong first-quarter performance will make next week's announcements look even worse.
When this quarter's earnings are reported later next week it will be clear how bad the market is doing at the moment. It was previously predicted that this credit crisis was going to slowly come to an end, but since the start of the new year, the crisis is affecting more people and more financial services. Due to the fact that the overall market is weak, the situation is even more dire. When the reportrs come out next week, they will apppear even more severe than they are because of last year's strong first-quarter performance. One example of this earning issue is Goldman (GS, Fortune 500), which had largely escaped the troubles of 2007. They 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.
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