Lehman loss confirms Wall Street’s deep troubles

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New York, Sep 13: Lehman Brothers Holdings Inc’s results on Wednesday confirmed the market’s worst fears—Wall Street’s third-quarter was very ugly.

With its shares tumbling, the No 4 investment bank announced a $3.9 billion net loss fuelled by nearly $8 billion in asset write-downs. And while all eyes were focused on Lehman’s plan to spin off $30 billion in risky assets and the sale of its money management arm, the results also revealed just how much business has slowed on Wall Street.

“We knew the quarter was not going to be a strong one and Lehman was a confirmation. Everybody is expecting the fundamentals will look weaker this quarter,” said Helena Ocampo, who helps manage $5 billion at Sentinel Advisors in Montpelier, Vermont.

So while no two investment banks are exactly alike, Lehman’s results offer a clue to what investors can expect next week. Goldman Sachs Group Inc and Morgan Stanley, which like Lehman closed their fiscal quarter at the end of August, are expecting their weakest results since the tech stock bubble burst in 2000.

The steep mark-downs also bode ill for Merrill Lynch & Co Inc, which is in the final weeks of its calendar year quarter. Merrill, like Lehman, is struggling under out-sized exposures to risky mortgage, commercial property and other asset-backed securities.

“In a word, business was ‘lousy,’” Ladenburg Thalmann analyst Dick Bove said in a note.

Well into the second year of a global credit crunch, Wall Street firms are really starting to feel the pain. Analysts for weeks slashed their forecasts as trading conditions grew worse, equity markets tanked and deal activity slowed to a crawl.

Investment banking revenues have plunged by a third to $600 million since the second quarter and fell by half from last year, fuelled by lower demand for debt underwriting, stock issuance. Merger and acquisitions revenue was little changed from the second quarter, but it was down by half from last year.

Even investment management revenue fell by a quarter, to $600 million, reflecting a decrease in assets.

“There is concern about the viability of the whole investment banking community,” said Sean Egan of independent credit analysis firm Egan-Jones Ratings Co.

Goldman and Morgan Stanley differ in their focus across equities, fixed income and commodities and the quality of their assets vary greatly. Still, Lehman’s results show the trend is negative. In every business “revenues were down on both a sequential and year-over-year basis, highlighting the cyclical slowdown that all of the large-cap brokerage firms will face,” Oppenheimer analyst Meredith Whitney said in a recent note.

Across the board, the engines that powered years of record profit are sputtering. Global debt underwriting slumped by half to $2.7 trillion, in the year ended August 31, compared with the previous year. That figure reflects the steep plunge in mortgage activity, with $140 billion of mortgage backed debt issued during this period, compared with $900 billion the year earlier.

Results elsewhere on Wall Street were not much better. Global equity underwriting fell by more than half, while the dollar value of announced mergers and acquisitions worldwide is down 20% and completed M&A fell 58%.