Merrill Lynch, Morgan Stanley and Bear Stearns Suffer Losses as Ratings Agencies Are Grilled over Sub-prime’s

Merrill Lynch will soon report third quarter earnings which analysts have revised downward. An analyst at competitor Goldman Sachs says that Merrill’s earnings for the third quarter will be about $1.80 per share, down from $1.95 and lowered Merrill’s stock price target to $94 from $108. The Goldman analyst predicted that Merrill will have $4 billion in write-downs, primarily from the fixed income division, resulting in a net loss of $1.5 billion for the quarter.

Other analysts’ expectations were even even lower: Fox Pitt Kelton’s analyst lowered earnings per share estimate for Merrill to $1.20, from a previous estimate of $1.91, “while noting that forecasting confidence is low in periods such as these.” He also expected the firm to experience $3.5 billion “in gross negative marks and realized losses” on leveraged loans, CDOs, and mortgages resulting in $2.2 billion in net losses and attributes the more positive net loss estimate to “$700 million in hedging gains; $500 million in loan fees; and $100 million in gains on liability marks.”

Morgan Stanley reported last week that it suffered a 17 percent drop in profit compared to the third quarter last year, earning $1.44, about ten cents below analysts’ estimates, with loan losses of $1 billion the culprit.

Bear Stearns has been center stage in mortgage related investment problems which have hit the investment community. That firm reported last week that it experienced a 61 percent drop in profits compared to the third quarter last year. This was mostly caused by multi-million dollar losses in mortgage focused hedge funds.

Meanwhile, Goldman Sachs, beat all analyst’s earnings per share predictions by more than $1.50, with $6.13 earnings per share in the third quarter, claiming that credit hedging had mitigated the firms loss. Lehman Brothers reported better than expected earnings of $1.54 per share despite $700 million in losses related to the credit crunch.

In the wake of the mortgage backed securities meltdown, Congress is investigating credit rating agencies over how and why ratings on such securities failed to reflect the danger. The SEC Chairman testified that the SEC is examining whether agencies including Moodys Investors Service and Standard & Poors were “unduly influenced” by issuers and underwriters that paid for the credit ratings. A union pension fund is suing the Moody’s credit rating agency over its “excessively high ratings” of bonds backed by subprime mortgages.

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