Wall Street Winces at Writedowns

Fear rises as Morgan Stanley loses a quarter of its value in a week.
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Morgan Stanley

(MS) - Get Report

may soon join the ranks of the big writedown elite.

Shares of the brokerage firm were down nearly 6% in trading Wednesday. At their intraday low just above $50 a share, Morgan Stanley shares have lost a quarter of their value in the five trading days since Halloween.

The plunge comes as Wall Street analysts race to predict the next big brokerage firm to be whipsawed by steep losses on mortgage-backed securities and related holdings. Rival

Goldman Sachs

(GS) - Get Report

has also seen its shares dragged down by speculation that the two institutions were not as untouched by the mortgage market collapse as many had previously believed.

The concerns follow last month's multibillion-dollar writedowns at

Merrill Lynch

(MER)

and

Citigroup

(C) - Get Report

, which sparked two high-profile CEO ousters.

Shares of Goldman Sachs are down more than 4% Wednesday and nearly 7% thus far this week, despite the firm's denial of rumors that it has more exposure to the collateralized debt market than has been previously disclosed.

Several analysts took a stab this week at estimating fourth-quarter writedowns for Morgan Stanley and the other large brokerage firms, though most acknowledge that their stab is slightly in the dark. Information on the exact levels firms are exposed to collateralized debt obligations (CDOs) and structured investment vehicles (SIVs) are fuzzy, at best.

The estimates for Morgan Stanley's possible fourth-quarter writedown range from CreditSights' $3.8 billion, to Deutsche Bank analyst Michael Mayo's $3 billion to $4 billion to Fox-Pitt, Kelton's David Trone's $6 billion -- though all noted the low level of information available.

Trone downgraded Morgan Stanley to in-line from outperform, while Mayo left Morgan's rating at buy. CreditSights puts Morgan Stanley's problems at the bottom of the brokers' list, and estimates that it may take the firm just a half year to earn back its losses.

By contrast, Bear Stearns tops CreditSights' problem list, and may take more than 18 months to earn back its losses, says the firm.

Sanford Bernstein's financial analyst Brad Hintz says in a note Wednesday that while the market is clearly pricing in a fourth-quarter writedown for Morgan Stanley, "We don't see how anyone can determine this from the analysis of the public data."

He notes that Morgan Stanley was not a major mortgage-backed security or CDO underwriter -- putting it in a relatively less dangerous spot than many of its competitors. But he also adds that in a recent conversation with Morgan Stanley CFO Colm Kelleher, the executive said it may take three to four quarters for the fixed-income market to return to normal operations. Hintz maintained his outperform rating for Morgan Stanley.

It seems analysts, like investors, have decided it's better to be cautious as they tire of being caught off-guard by surprise writedowns stemming from these opaque asset-backed securities markets.

In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click

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