Big Expectations at Goldman

The brokers look to blow out their numbers starting this week.
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Big brokerage houses are ready to roll out some big numbers.

Bear Stearns



Lehman Brothers



Morgan Stanley

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Goldman Sachs

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are due to post fiscal first-quarter earnings this week.

Investors are expecting a continued run of robust results, though they'll be on the lookout for any signs of losses tied to the swooning subprime mortgage business.

Revenue from M&A advisory services and private equity continued to be strong across the board. And despite a bit of recent stock market slippage, trading -- the biggest profit-maker for all the brokers -- was solid during the quarter.

First-quarter earnings for the brokers "will in fact be strong," writes Lauren Smith, an analyst at Keefe Bruyette & Woods. "Concerns over big brokers' exposures to subprime, while they are not totally immune, are overdone. Ultimately they will navigate through this storm in good shape. Given the size of the balance sheets and the capital positions, direct mortgage exposures to subprime are relatively modest in the grand scheme of things."

Brokers including Lehman, Bear Stearns and

Merrill Lynch


have a hand in subprime -- the business of lending to homebuyers with spotty credit histories -- because they recently bought into the business. Brokers also are involved in selling mortgage-backed securities and collateralized debt obligations backed at least in part by subprime mortgages.

Over the past month, many subprime lenders have seen shares crumble as delinquencies and defaults have picked up among homebuyers with weak credit histories. Investors have been worrying that some lenders might go under.

New Century Financial

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Fremont General


have stopped making new loans as credit dries up.

Guy Moszkowski, an analyst at Merrill Lynch, cut his ratings on Goldman Sachs, Lehman and Bear Stearns two weeks ago to neutral.

"It appears the industry is exiting the first quarter on a downtrend, with pressure on the mortgage market now being exacerbated by deteriorating risk appetites elsewhere," including emerging markets and U.S. corporate high yield and investment grade debt, he writes.

Goldman is first out of the gate on Tuesday. Wall Street expects the firm to make $4.90 a share, down from the year-ago $5.08, on revenue of $10.7 billion. Analysts say the brokerage titan is the least of the four exposed to potential subprime problems -- partially because it has not bought an originator.

But even if brokers have problems from subprime exposure, it will be difficult to ferret out, observers say. Most brokers do not disclose their subprime loan losses or any losses associated with the trading of the securities backed by subprime mortgages. It will also be difficult to tell if the exposure to these risky loans shows up in other areas of the businesses.

Up Wednesday is Lehman, where earnings are expected to rise to $1.95 a share from $1.83 a year earlier, on an 11% gain in revenue to $4.97 billion.

Lehman's "overall business is pretty diversified," which will offset any pressure in the U.S, says Joe Dickerson, an analyst in London at Atlantic Equities. "Bear is relatively less diversified than Lehman."

Bear Stearns goes Thursday morning. It's expected to make $3.80 a share, up from last year's $3.54, on a 14% rise in revenue to $2.49 billion.

"My suspicion is that a lot of the asset management assets at Bear Stearns may be invested in mortgage-related securities," Dickerson says, "which could pressure returns and therefore future growth and assets under management."

Dickerson agrees that any spillover into additional businesses will be "something to watch."

Another firm to watch will be Morgan Stanley. Analysts expect it to make $1.87 a share, up from $1.51 a year ago, on revenue of $9.87 billion. Last week the firm reportedly renewed financing for troubled subprime lender

New Century Financial

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, whose shares have plunged nearly 80% in the last week. Morgan hasn't set an earnings release date yet.

Overall, Morgan Stanley's subprime exposure is "difficult to handicap," says Mark Lane, an analyst at William Blair in Chicago, "but even if there is an issue it doesn't mean they can't make it up somewhere else."