Caution: Crumbling Wall Street earnings ahead

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.

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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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Fed Loans Not Easing Credit Crunch

Banks could very well trip over themselves Monday as they bid on $50 billion in loans in the latest Federal Reserve auction.

But despite this eagerness to accept the government's "liquidity" injections, banks aren't significantly increasing their lending, experts said. In fact, some banks seem to be pulling back even further - for example, Citigroup Inc.'s (C, Fortune 500) last week said that it will scale back its mortgage business.

"It's still not enough to get the banks to loosen their lending terms," said Walker Todd, a research fellow at the American Institute for Economic Research and former attorney and economist at the New York Fed.

Banks have already borrowed a total of $160 billion since the Fed started holding these auctions in December as a way to ease the credit crunch, which began last year when mortgage defaults and foreclosures began to skyrocket. Since then, the crisis has extended far beyond the residential home loans, roiling the markets for everything from municipal bonds to student loans to auto financing.

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This article addresses the "liquidity" that the government says it has and the lack of increase in the bank's lending. Many banks even seem to be decreasing their lending. The Federal Reserve has been holding auctions since December in an attempt to ease the "credit crunch" that began as a result of mortgage defaults and foreclosures increasing dramatically. This "crunch" has grown to include municipal bonds, students loans, and auto financing. This "credit crunch" has even called to securities backed by Fannie Mae and Freddie Mac have been called into question. Because of this, the auctions are anticipated to continue for at least six more months. According to Tom Schlesinger, the Fed's actions are showing a "deepening sense of anxiety." The Fed has taken many steps to ease this credit crunch that the United States's economy is experiencing. Some believe that the problem is not with the liquidity; however, it is with the fear of rising defaults which causes them to "shy away" from offering credit. Another issue facing banks is the low capital standing that they have. Banks and the Federal Reserve have partnered and are making attempts to increase bank's capital standing. If the capital standing is raised, then banks may be more likely to lend money which can begin to reverse the credit crunch.

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