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Wall Street may see $460b more in credit losses

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Bloomberg News / March 26, 2008

NEW YORK - Wall Street banks, brokerages, and hedge funds may report $460 billion in credit losses from the collapse of the subprime mortgage market, or almost four times the amount already disclosed, according to Goldman Sachs Group Inc. Profits will continue to wane, other analysts said.

"There is light at the end of the tunnel, but it is still rather dim," Goldman analysts including New York-based Andrew Tilton said in a note to investors yesterday. They estimated that residential mortgage losses will account for half the total and commercial mortgages for as much as 20 percent.

Earnings and share prices at US financial institutions tumbled in the past year as fallout from the mortgage crisis spread to other markets. Demand for mortgage-backed securities evaporated, leading to the collapse of Bear Stearns Cos., once that market's largest underwriter, and a Federal Reserve-led bailout by JPMorgan Chase & Co. this month.

Goldman's own share-price estimate was cut 3.7 percent to $210 at Fox-Pitt Kelton Cochran Caronia Waller. The research firm also reduced its profit estimates for the world's biggest securities firm for the rest of this year and all of 2009.

Merrill Lynch & Co.'s 2008 profit estimates were cut 45 percent at JPMorgan on concern the third-largest US securities firm by market value may disclose further write-downs on subprime mortgages. Merrill may report a total of $5 billion in additional losses on collateralized debt obligations, so-called Alt-A mortgages, and commercial mortgages, New York-based analyst Kenneth Worthington said.

Bank of America Corp., the second-biggest US bank by assets, was downgraded to "sell" from "neutral" at Merrill Lynch. The company, based in Charlotte, also saw its earnings-per-share estimate lowered to $3.30 from $3.50 in 2008 and to $4 from $4.40 in 2009, by analysts including New York-based Edward Najarian in a note to clients yesterday.

Lehman Brothers Holdings Inc., the fourth-largest US securities firm, had its share-price forecast cut 16 percent to $70 at Fox-Pitt. The brokerage's 2008 and 2009 profit estimates were also reduced.

Goldman said the $460 billion in credit losses it foresees may "result in a substantial tightening in credit conditions as these institutions pull back on lending to preserve their reduced capital and to maintain statutory capital adequacy ratios."

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