Recovery Proves Elusive for Many of Street’s Analysts

Here at HW, we’ve been covering the mortgage meltdown for well over a year, and the question of recovery is one that keeps coming up each and every quarter. And every quarter, it seems, the answer drudged up is one that says it’s just over the horizon — two to four quarters, max (Wall Street can’t really see much past a four-quarter long future). But there’s an old saying about horizons; they’re always out there, and you never really reach them. So it has been with the mortgage mess in particular. In Q3 of last year, we had whispers from Street analysts that the quarter would be of the “kitchen sink” variety, which of course it wasn’t. Similar thoughts ensued for the fourth quarter of 2007; then the first quarter of 2008; and then yet again for the second quarter of 2008. Now that we’re well into the third quarter of 2008, some Street analysts are beginning to realize a little earlier in the cycle — read: before earnings come out — that the write-downs and credit costs associated with mortgages and other structured finance gone awry are likely to stick around a while longer. The latest to capitulate here was Goldman Sachs (GS), which slashed its earnings estimates again for banks and brokerages on Wednesday, according to a MarketWatch report. In a report, the Goldman analysts said that recovery “is still a few quarters away, as we anticipate additional asset sales and write-downs in coming quarters throughout the financial-services sector.” They also suggested that despite capital raises and efforts to deleverage, much more work in both areas likely remains ahead for commercial and Wall Street banks. “Once again, the majority of our negative estimate revisions are being driven by higher than estimated write-downs on mortgage assets,” the analysts suggested in lowering estimates for Morgan Stanley (MS), Lehman Brothers Holdings Inc. (LEH), J.P. Morgan Chase & Co. (JPM), Citigroup Inc. (C) and Merrill Lynch & Co. (MER). Other factors (ahem, auction rate securities, anyone?) also weighed in as well. Lehman in particular has been the subject of the most mortgage-led speculation given to any company not named Fannie Mae (FNM) or Freddie Mac (FRE) these days. A team of analysts at JP Morgan estimated that Lehman could face up to $4 billion in write downs earlier this week, helping send the i-banking outfit on its latest downward plunge. Lehman absorbed $2.4 billion in write-downs to its residential mortgage-related positions in Q2; the firm reduced its residential mortgage exposure from $31.8 billion to $24.9 billion during the quarter. MBS and ABS assets remain dominant on Lehman’s overall book, however, valued at $72.5 billion of the company’s $248.7 billion in total assets at the end of May; the second-largest asset category is the firm’s corporate debt, by comparison, which represents $50 billion. Disclosure: The author was long FRE and held no other positions in companies mentioned when this story was published; indirect holdings may exist via mutual fund investments, as well. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.