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Goldman Call Mauls Merrill

Shares fall on the latest round of brokerage-outlook cuts.

Merrill Lynch


sank 2% after

Goldman Sachs

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slashed third-quarter earnings expectations, predicting a huge writedown caused by weak credit markets.

Goldman analyst William Tanona slashed quarterly estimates on Merrill Lynch by a whopping $1.80 a share for the third quarter. He now expects the New York firm to earn just 15 cents a share in the quarter. He also cut his full-year estimates by $2.30 a share, to $6.75 a share.

Merrill's fiscal third quarter ends on Friday. The company will report earnings results next month.

The estimate cuts come in the wake of mixed results from other large brokerage firms, including

Bear Stearns



Lehman Brothers

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Morgan Stanley

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Bear and Lehman, with the most exposure to mortgages, each took roughly $700 million in writedowns, while Morgan Stanley took a $940 million writedown primarily due to leftover leveraged loans for the quarter.

Late last month, Tanona had anticipated a rough third quarter when he cut earnings estimates on Bear Stearns, Lehman and Morgan Stanley. He said at the time that August "was one of the worst operating environments that we have seen for the investment banks in years."

He sounded a similar theme Wednesday.

"We are lowering estimates following a weak reporting season from the November year-end brokers," Tanona wrote in Wednesday's note. Merrill Lynch "appears to be caught in the cross hairs of a number of headwinds in the quarter -- leveraged loan losses, mark to market losses on their CDO exposure, and deteriorating mortgage fundamentals."

"On the fixed income side of the business, we are assuming a $1.5 billion total loss on the business, driven by largely by our expectation for roughly $4 billion in mark to market losses," he wrote. "The mark to market losses are likely made up by a combination of leveraged loan losses, CDO exposure and associated write-down of inventory and other mortgage related and residual writedowns."

"On the equities front, higher levels of volatility is likely to have made for a challenging environment in the equity linked business, although extremely high levels of client activity and share volumes likely drove solid cash equities results," Tanona added.

Tanona added in Wednesday's note that while he was lowering estimates on only Merrill Lynch today, "other firms in our universe that report earnings in October are at risk but their product diversity could shield them more."

Shares of Merrill sank $1.52 to $70.60.