Published March 27, 2008

Sub-prime to cost Wall St US$460b in losses: Goldman

(NEW YORK) Wall Street banks, brokerages and hedge funds may report US$460 billion in credit losses from the collapse of the sub-prime mortgage market, or almost four times the amount already disclosed, according to Goldman Sachs Group.

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 said on Tuesday. They estimated that residential mortgage losses will account for half the total, and commercial mortgages as much as 20 per cent.

Goldman said that the US$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'.

Earnings and share prices of 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, once that market's largest underwriter, and a Federal Reserve-led bailout by JPMorgan Chase & Co earlier this month.

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

Merrill Lynch had its 2008 profit estimates cut by 45 per cent at JPMorgan on concern that the firm may disclose further writedowns on sub-prime mortgages. Merrill may report a total of US$5 billion in additional losses on collateralised debt obligations, so-called Alt-A mortgages and commercial mortgages, analyst Kenneth Worthington said.

Bank of America was downgraded to 'sell' from 'neutral' at Merrill Lynch. It also had its EPS estimate lowered to US$3.30 from US$3.50 this year and to US$4 from US$4.40 next year, analysts wrote on Tuesday. Lehman Brothers Holdings had its share-price forecast cut 16 per cent to US$70 at Fox-Pit - AFP