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Goldman Cuts Morgan Stanley

A weak trading environment is likely to hurt earnings, the report says.
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Goldman Sachs

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has lowered its third-quarter earnings estimates for rival

Morgan Stanley

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arguing weak trading activity is likely to hurt profits.

The report by analyst Richard Ramsden cites an earnings miss by

Jefferies & Co.

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earlier in the month as evidence of the weak trading environment. Also this month,

Deutsche Bank

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analyst Michael Carrier cut his estimates for Morgan Stanley and Goldman, citing similar factors.

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Ramsden stated in his report that "the weakness is somewhat well known," but argues a still-unresolved question is the impact of new global guidelines, known as Basel 3, that increase the minimum amount of capital banks are expected to hold to guard against potential losses. Citing figures provided by

JPMorgan Chase

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about the impact on its business, Ramsden sees a potential 20% increase in so-called "risk-weighted assets."

Risk-weighted assets (RWA) refers to a formula for determining how much of a capital cushion banks need based on the amount of risk they are perceived to be taking. Ramsden writes that a 20% increase in RWA would amount to $5 billion and have a "meaningful impact" on Morgan Stanley's return on equity.

Morgan Stanley shares were lower by 0.92% in early trading Wednesday, though slightly better than shares of Goldman,

Bank of America

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Wells Fargo

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JPMorgan Chase

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. Among the largest U.S. banks, only


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was higher in early trading.


Written by Dan Freed in New York


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