Wall Street Banks: $2 Billion Lost, More Pain Ahead
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The Fiscal Times
December 13, 2011

Investment banks and other financial industry participants involved in stock trading and market making just can't seem to catch a break.

Firms like Goldman Sachs (GS), Morgan Stanley (MS) and the beleaguered Jefferies Group (JEF) have already reported dismal results for the third quarter. Now comes news from the New York Stock Exchange that all of its member firms – those broker-dealers that make up the exchange – appeared to share the pain.

Only 96 of the 175 NYSE member firms reporting results indicated any kind of profit for the third quarter of this year; the number of unprofitable firms soared. Collectively, those member firms that do business with the public lost a stunning $1.92 billion in the third quarter, compared to profits of $2.1 billion in the second quarter and $4.7 billion in the third quarter of 2010.

Without question, the period was the worst three months on record for the industry since the height of the financial crisis three years ago, as investors avoided trading in volatile markets and companies were forced to postpone or even shelve plans to issue stocks or bonds whenever possible.

The outlook for the current quarter and the new year don’t appear much rosier. Jamie Dimon, CEO of JP Morgan Chase (JPM), warned attendees at Goldman Sachs conference last week that he expects investment banking revenues will stay flat and that the bank’s private equity division may report a loss. Analysts promptly trimmed their forecasts for the company's earnings, with Richard Bove of Rochdale Securities slashing his estimate by 13 percent to 88 cents a share. That's below the consensus – analysts expect the bank to earn 96 cents a share in the fourth quarter and $1.15 in the first quarter of 2012.

But can those estimates be trusted?

Not really, suggests new research from ThomsonReuters, which last week reported that its StarMine SmartEstimate models – which put greater emphasis on the most recent reports by the analysts with the best track records – appear to signal that the consensus is excessively bullish at this point. The StarMine models indicate that there is a high probability that between now and the time that firms like Goldman, Piper Jaffray (PJC) and Jefferies report their earnings for the fourth quarter early in the new year, investors will see more cuts in earnings estimates.

The best that Wall Street CEOs like Dimon can do at this point is to try to draw their shareholders' attention to what they say are the bullish long-term prospects for the industry, rather than extrapolating the current bearish environment. The problem, alas, is that investors may not want to stick around that long.

Business journalist Suzanne McGee spent more than 13 years at The Wall Street Journal before turning to freelance writing. Author of the book Chasing Goldman Sachs, she has written for Barron’s, The Financial Times, and Institutional Investor.