Mortgage Bank

Wall Street research analysts are projecting yet another tough quarter for U.S. investment banks marked by additional writedowns across a series of fixed-income assets amid an already weak operating environment.

Shares of Lehman Brothers Holdings Inc fell as much as 9 percent in morning trade Thursday, after a Citigroup analyst forecast big losses for the fourth largest U.S. investment bank, while a newspaper reported that an intended asset sale had collapsed.

Citigroup analyst Prashant Bhatia widened his third-quarter loss estimate for Lehman Brothers Holdings Inc. Bhatia and Lehman Brothers Inc analyst Roger Freeman also cut their third-quarter earnings estimates for Goldman Sachs Group Inc and Morgan Stanley.

"We are lowering our third-quarter estimates to reflect the difficult operating environment, characterized by lower client-related trading volumes and losses on hard-to-sell assets," Citigroup's Bhatia said.

Bhatia expects Lehman to take fresh asset-related writedowns of $2.9 billion. He expects $1.8 billion in writedowns at Goldman and $1.7 billion at Morgan Stanley.

"Based on further deterioration in several indices, we expect further writedowns, primarily related to mortgage assets," Bhatia wrote in an August 20 note to clients.

Lehman analyst Roger Freeman said writedowns for this quarter would come from exposures to prime residential mortgages, subprime mortgages and securities, Alt-A residential mortgages and securities, collateralized debt obligations, and leveraged loans.

Commercial mortgages have also experienced price depreciation this quarter, as measured by widening commercial mortgage-backed securities spreads and a decline in the CMBX index, which tracks commercial-mortgage-backed securities, Freeman said.

Troubled-asset disclosures for U.S. brokers and asset managers total $443 billion, down from $599 billion a quarter ago, Hecht said. He, however, added that there was still quite a "hangover" to work through for the industry.

Among the companies under his coverage, Lehman has the largest exposure to troubled assets at about $72 billion, while Morgan Stanley has the least at about $25 billion, Hecht said.

Financial services firms have recorded more than $400 billion in writedowns on investments, largely as a result of the subprime mortgage crisis which has roiled global markets since last year.

THIRD-QUARTER OUTLOOK

Lehman's Roger Freeman and Citigroup's Prashant Bhatia were the latest among Wall Street research analysts to cut their outlook for U.S. investment banks.

Since the start of this month, analysts at Merrill Lynch, Fox-Pitt and Bernstein have cut their estimates for Goldman and Morgan Stanley, while forecasting a third-quarter loss for Lehman.

Freeman on Thursday cut his third-quarter earnings estimates for Goldman to $1.70 a share from $3.77, and for Morgan Stanley to 75 cents a share from $1.13.

A second round of estimate cuts is most likely with Goldman's earnings and this will cause shares of the largest U.S. securities firm to be at the "greatest risk" through the end of the quarter, Freeman said.

Freeman rates Goldman and Morgan Stanley "equal-weight."

Citigroup's Bhatia cut his earnings estimates for Goldman to $2.50 a share from $4.50, and for Morgan Stanley to 75 cents a share from 76 cents.

He widened his third-quarter loss view for Lehman to $3.25 a share from 41 cents a share.

NEUBERGER SALE LESS LIKELY?

Bhatia, however, said he saw a "lower probability" that Lehman would sell its Neuberger Berman business or raise capital in the near term.

Several Wall Street analysts have been speculating a possible sale of all or a portion of Lehman's asset-management business -- a move mentioned in media reports as a possibility for weeks.

Experts estimate the business, whose core is Neuberger Berman, could be worth about $8 billion.

"Even under the potentially more stringent rating agency guidelines related to the amount of preferred securities in the capital mix, we anticipate that Lehman can absorb over $3 billion of after-tax losses without adding more common equity," Bhatia said.

Bhatia rates Lehman and Morgan Stanley "buy," and Goldman "hold." He cut his price target on the shares of Lehman to $35 from $50. Shares of Lehman closed at $13.73 Wednesday on the New York Stock Exchange, while those of Goldman closed at $158.25 and Morgan Stanley at $37.40.

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