Updated from 3:32 p.m. EST

The first quarter isn't living up to expectations for battered Wall Street investment banks and brokerages. After falling sharply since early January, securities-industry stocks were down again Tuesday on concerns a recovery will take longer than investors had hoped.

Underwriting and trading businesses have slowed in recent months from already weak fourth-quarter levels, analysts said. In the meantime, worries about corporate-credit quality are growing as the Enron story continues to unfold, raising concerns about banks' and brokerages' exposure to bad debt.

Data on the fiscal first quarter that ended February show mergers and acquisitions and debt deals so far have declined vs. the November-ended quarter, and could continue to fall in coming months. Trading volumes, meanwhile, are flat vs. the fourth quarter and down vs. the year-ago period. Equity underwriting has been the one positive for the group so far, but it's up only after a dismal fourth quarter.

Despite declining since early January, sector stocks may have more room to fall, analysts said. "It's hard to predict these businesses three to six months out," said James Mitchell, an analyst with Putnam Lovell Securities. "The economy is expected to pick up in the second half, but capital markets may take longer to recover." The American Stock Exchange Broker/Dealer Index has fallen 17% since Jan. 4 and was down 4% Tuesday.

Individual stocks were down across the board. Goldman Sachs ( GS) fell 5.2% to $78.45, Lehman Brothers ( LEH) fell 4.4% to $55.43, Morgan Stanley Dean Witter ( MWD) fell 2.8% to $47.04, Merrill Lynch ( MER) fell 3.7% to $46.50 and Bear Stearns ( BSC) dropped 4.3% to $53.87.

Larger banks like J.P. Morgan Chase ( JPM) and Citigroup ( C) also fell, losing 3.4% to $29.03 and 4.3% to $42.22, respectively.

Smaller retail and online brokerages were also lower: Ameritrade ( AMTD) dropped 3.7% to $5.28, E*Trade ( ET) tumbled 4.8% to $8.19, Charles Schwab ( SCH) lost 5.8% to $13.19 and Raymond James ( RJF) fell 4.7% to $31.52.

"People are getting a little nervous about the valuations part of the equation and that may be a rebound won't be as dramatic as they expected," said Mitchell, who thinks consensus earnings estimates for 2002 may have to come down by as much as 10%. Mitchell suggested that 2 to 2.5 times book value is a reasonable trading range for the smaller banks in the sector, while 2.5 to 3 times book value is a good range for the bigger ones.

Diane Glossman of UBS Warburg, meanwhile, said she isn't currently recommending any of the broker-dealer stocks.

Anemia

According to Bloomberg data, completed mergers and acquisitions deals since the start of December are down 50% from the fourth quarter, to $373 billion. "And you're probably not going to make that up in the next few weeks," said Putnam's Mitchell. Announced deals, meanwhile, or deals that should close in the next three to nine months, are off 45% for the whole group vs. the fourth quarter -- suggesting that fees could fall even further in the next several months, said Mitchell.

Debt underwriting -- strong last year due to tumbling interest rates, which spurred a refinancing boom -- is down 31% vs. the November-ended quarter. Mitchell said total debt-underwriting activity could fall as much as 20% in 2002. Trading volumes, meanwhile, are flat with the November-ended quarter and down 7% from the year-ago period.

The one sweet spot, equity underwriting, is up 39% vs. the November-ended quarter, but that is more of a bounce than an uptrend after a dismal previous few months, said Mitchell. January saw very few deals get done; February has been relatively slow and the outlook isn't great. "We had a couple of nice deals in December. We've got Travelers in the second quarter, but otherwise there isn't a big pipeline for equities," said Mitchell.

In general, the bigger investment banks get 50% of their revenues from trading, 25% from mergers and acquisitions underwriting, and 25% from equity and fixed-income underwriting. Revenues from asset management and retail brokerage business vary widely. For example, the retail brokerage is a huge part of Merrill Lynch's business, while Goldman Sachs has a sizable asset management business.

Exposure

Adding to the worries, Congress said Tuesday it would like more information on Wall Street's connections to Enron.

According to The New York Times, congressmen are particularly interested in studying Merrill Lynch and Citigroup's roles in structuring Enron's off-the-books partnerships. Credit Suisse First Boston and Deutsche Banc Alex. Brown might also be the subject of hearings, the article said.

J.P. Morgan is already feeling the wrath of investors for allegedly low-balling its Enron exposure. Last week, law firm Glancy & Binkow announced a class action lawsuit against the company, alleging that it "recklessly" misstated its exposure to the fallen energy giant. Mitchell said he did not think the suit was a big threat to the company. "We see shareholder lawsuits all the time, not that it isn't a risk, but you don't usually see dramatic losses from these suits. I'm not too concerned about that," he said.

Moody's Friday maintained its debt ratings on J.P. Morgan, which lost $332 million last quarter due to its exposure to Enron and Argentina, and continued losses on its private-equity investments. The ratings agency cited J.P. Morgan's strong capital base and liquidity, as well as recent cost-cutting measures and a diversified earnings stream.