- The Washington Times - Monday, September 17, 2007

NEW YORK (AP) — On Wall Street, now more so than any time in recent memory, everyone is holding their breath and fearing the worst.

Four of the biggest U.S. investment banks will report third-quarter earnings in the next several days. Everyone — from traders on the floor of the New York Stock Exchange to highly paid bankers perched in corner offices — is looking for any kind of sign that these financial institutions have weathered one of the rockiest markets in years.

Goldman Sachs Group Inc., Morgan Stanley, Lehman Brothers Holdings Inc. and Bear Stearns Cos. have been squeezed by turmoil in the mortgage industry and tightening credit conditions. Their results will provide a badly needed first glimpse into the health of the global financial market.

The investment banks, along with other financial firms, make up about a quarter of the Standard & Poor”s 500 index. It is a long-held conviction that this group must show strength in order for the blue-chip index to advance — and that anything less could extend the volatile conditions that marred most of the summer. As it stands, the firms on average lost about 20 percent during the quarter — with Bear Stearns leading them with a 31 percent decline.

“They are terribly, terribly important,” said Quincy Krosby, chief economist for the Hartford. “I don”t think you can have a truly sustainable rally unless the financials stabilize. For the retail investor, the earnings will give general guidance for where we are in unraveling the crisis.”

Investors have been nervously watching their 401(k) and stock portfolios tumble, as the financial industry began to shudder from the pressure of weakening investments and dwindling access to capital.

There is widespread fear that banks are not only sitting on bad loans and wrong-way trades, but they might also detail stalling takeover activity and a dearth in corporate debt financing. Accounting rules that let firms place a value on assets based solely on their best guess of the worth could muddy the waters further.

Richard X. Bove, an analyst with Punk Ziegel & Co. who has been among the industry”s toughest critics, said there is a likelihood that the banks” auditors met with the Securities and Exchange Commission about what must be divulged on their balance sheets. He points out that regulators would be “willing to go the extra mile to keep them in reasonable shape” and that it might be some time before investors get more accurate information.

“If history is any gauge, you”ll have to wait for their quarterly filing to the Securities and Exchange Commission to find out what is really going on with these companies,” Mr. Bove said. “It”s going to be tough to make judgments.”

Quarterly reports filed to the SEC, also known as 10-Qs, must be submitted to the regulator within 45 days of the end of the quarter. These documents typically offer more detail than what is released in earnings reports.

Lehman Brothers reports tomorrow, and analysts like Mr. Bove will scan for how much troubled debt is on the firms” books. In August, Lehman shuttered most of its mortgage business.

Morgan Stanley, which has very little exposure to subprime mortgages, is known as one of the most aggressive traders on the street. Its report Wednesday will also be closely watched.

Goldman”s report Thursday will be a barometer of the overall industry because it is the most diverse investment bank and it might have used volatile market conditions to make shrewd trades. The firm acknowledged last month that its flagship hedge fund suffered steep losses.

Bear Stearns also reports Thursday, and Wall Street will look for how its vast fixed-income business performed during the past few months. Two Bear Stearns hedge funds collapsed into bankruptcy this summer after wrong-way bets on mortgage debt.

Merrill Lynch & Co., the world”s largest brokerage, will report its results in October. However, the broker said Friday that it recorded adjustments to the value of certain investments in the third quarter, acknowledging that they lost value as the debt markets remain in seizure.

But regardless of how this week”s results pan out, Wall Street”s big players might be thrown a lifeline. The Federal Reserve, which has been injecting cash into the banking system to help stabilize it, will meet tomorrow to ponder a much-anticipated interest-rate cut.

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