Thursday, 30 August 2007

Wall sreet revenues to feel the pinch

You may have noticed I've been harping on about earnings for a while. Except for some recent downgrades from Merril Lynch Wall Street seems slow in grasping the effect on earnings for financial companies.

Could it be due to the lack of transparency in the financial markets and company balance sheets in general that analysts have yet to start downgrading in any significant way? Or maybe they're just sitting tight and waiting to see how long this will play out...they could be waiting a while.

Well whilst the brokers have been relatively quiet the folks at Standard and Poor's have been busy calculating potential losses in investment banking and trading revenue for major securities firms. From Bloomberg:

S&P Says Rout May Hurt Wall Street More Than in 1998

Aug. 29 (Bloomberg) -- Standard & Poor's said business conditions for securities firms are worse than in the second half of 1998 and revenue from investment banking and trading could fall 47 percent in the final six months of this year.

The rating company said it conducted a ``stress test'' designed to measure the ``ability of investment banking businesses to withstand such scenarios.'' The conclusions don't constitute a forecast, S&P said in a statement.

``This is more severe than in 1998,'' when investment- banking and trading revenue fell 31 percent in the second half following Russia's debt default, S&P analyst Nick Hill said in the statement. At the time, revenue from fixed-income, currencies and commodities was negligible or even negative, he said. As in 1998, firms are likely to cut bonuses to stay profitable, said Hill, who is based in London.

Click on the heading for the full article. No doubt this time round will be more severe and prolonged. The Russian default and subsequent meltdown of LTCM was relatively isolated.

Today thanks to a vast array of opaque financial instruments the current crisis is spread to all corners of the world - ironically this so-called diversification of risk was touted as the reason we wouldn't experience the kinds of problems we now currently inhabit.

Anyone hear about a bankrupted hedge fund in Australia today? How about the Carlyle group bailing out a subsidiary? Or the shutdown of a London hedge fund? No? What about State Street's exposure to the shoddy end of the commercial paper market? Or the recent revelations of sub-prime exposure for Bank of China?

These stories emerged in just the last week, all but one in the past couple of days. I don't want to get off track here but I think you get my point that this thing is not isolated or 'contained'.

A few of the major securities firms will report 3Q07 earnings next month and we will also hear some earnings pre-announcements from others. More interesting than the numbers will be the forecasts for future quarters. Or will it all be academic if the Bernanke put is invoked on the 18th?