A $45 Billion Writedown Won't Stop Second-Best Wall Street Year

Even after the record $8.4 billion writedown for bad debts at Merrill Lynch & Co., the unprecedented ouster of three chief executives within five months and the elimination of $84 billion of market value at the five largest securities firms, Wall Street still is poised to report its second-most profitable year.

And 2008 may be better.

``As the bombs are dropping and the mines are exploding, it's a bit of a surprise,'' said Kenneth Crawford, who helps oversee $950 million at St. Louis-based Argent Capital Management LLC, which holds Morgan Stanley and Merrill shares.

The collapse of the subprime mortgage market derailed the careers of Merrill Chief Executive Officer Stan O'Neal, Citigroup's Charles O. ``Chuck'' Prince III and UBS AG's Peter Wuffli. Together, those companies accounted for about 60 percent of the $45 billion of writedowns reported by the world's biggest banks and securities firms so far this year. The industry already has cut 10,000 jobs.

Amid the gloom, analysts estimate New York-based Goldman Sachs Group Inc., Merrill, Morgan Stanley, Lehman Brothers Holdings Inc. and Bear Stearns Cos. will earn a combined $28 billion this year, down 8.3 percent from the record $30.6 billion in 2006, according to a survey by Bloomberg. Analysts currently estimate the firms' net income will reach $32 billion in 2008.

Goldman and Lehman will report their highest earnings ever this year, while profits will drop 42 percent at Merrill, 34 percent at Bear Stearns and 6 percent at Morgan Stanley. In 2008, analysts predict all the firms except Goldman will post higher profits. Goldman, led by CEO Lloyd Blankfein, will earn a Wall Street record $11 billion this year and then $10.5 billion in fiscal 2008, analysts estimate.

Reason for Optimism

``When you look to next year, you're back to earning money once these writedowns are taken,'' said Benjamin Wallace, who helps manage $750 million at Westborough, Massachusetts-based Grimes & Co. and owns Merrill and Morgan Stanley shares.

Les Satlow, who oversees $450 million at Cabot Money Management in Salem, Massachusetts, said he's more bullish on prospects for investment banks than commercial banks.

``The securities firms have less exposure to the consumer and greater exposure to overseas capital markets, which have a reasonable chance of remaining solid,'' Satlow said.

Goldman and Lehman made more than half of their third- quarter revenue outside the U.S., benefiting from faster growth in Asia and Europe. By contrast, Bank of America Corp. relies on the U.S. for more than 80 percent of its revenue.
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