Brokerages Caught in a Bear Trap

He estimates the four brokers will take a combined total of $13 billion in gross writedowns (approximately $7 billion in net writedowns) for the quarter ($5 billion related to Alt-A loans, $4 billion related to remaining leveraged loan exposure and another $4 billion for commercial mortgage exposure). The brokers took a combined net total of $12.1 billion in the fourth quarter, according to Trone.

"Outside of writedowns in both quarters, our [first quarter 2008] composite revenue is 2% lower than the [fourth quarter 2007], reflecting lower projected principal investment gains and investment banking activities, mitigated by increased in equities, asset management and private client businesses," Trone added.

Commercial real estate exposures also pose a threat for the quarter.

"The commercial real estate market is showing evidence that it is suffering from some of the same excesses that plagued residential real estate like higher prices and more aggressive underwriting standards," KBW's Smith wrote. In addition, "[t]here has been significant deterioration in the market for commercial mortgage-backed securities as evidenced in part by the sharp decline in the CMBX index, which tracks the performance of commercial-real-estate bonds with different credit ratings."

Smith estimates that the brokers will mark down their commercial mortgage-backed securities by about 5%. She writes that Lehman has the most exposure to commercial real estate with $39.5 billion of whole loans and securities, while Bear has the least exposure of the four firms.

But to be fair, the commercial market is "unlikely to experience the same domino effect that we have witnessed in the subprime residential arena as CDO investments are not as prevalent in commercial mortgages," she cautioned.

Shares of Bear Stearns plummeted by more than 50% on Friday on news of the bailout. Lehman's stock fell by 11%. Other brokers including Goldman, Morgan Stanley and Merrill Lynch(MER Quote - Cramer on MER - Stock Picks) fell between 4% and 5% on Friday.

Perhaps the most disconcerting thing about the Bear Stearns news to shareholders of brokerages is how quickly things can change.

Bear Stearns executives said in a conference call that it was "comfortable" with the range of earnings estimates by analysts. Analysts polled by Thomson Financial expected the firm to post earnings of 84 cents a share for the first quarter, down 78% from earnings reported a year earlier.