Lehman loss confirms Wall Street's deep troubles

NEW YORK (Reuters) - Lehman Brothers Holdings Inc's LEH.N results on Wednesday confirmed the market's worst fears -- Wall Street's third-quarter was very ugly.

With its shares tumbling, the No. 4 investment bank announced a $3.9 billion net loss fueled by nearly $8 billion in asset write-downs. And while all eyes were focused on Lehman's plan to spin off $30 billion in risky assets and the sale of its money management arm, the results also revealed just how much business has slowed on Wall Street.

"We knew the quarter was not going to be a strong one and Lehman was a confirmation. Everybody is expecting the fundamentals will look weaker this quarter," said Helena Ocampo, who helps manage $5 billion at Sentinel Advisors in Montpelier, Vermont.

So while no two investment banks are exactly alike, Lehman's results offer a clue to what investors can expect next week. Goldman Sachs Group Inc (GS.N) and Morgan Stanley (MS.N), which like Lehman closed their fiscal quarter at the end of August, are expecting their weakest results since the tech stock bubble burst in 2000.

The steep mark-downs also bode ill for Merrill Lynch & Co Inc MER.N, which is in the final weeks of its calendar year quarter. Merrill, like Lehman, is struggling under out-sized exposures to risky mortgage, commercial property and other asset-backed securities.

"In a word, business was 'lousy,'" Ladenburg Thalmann analyst Dick Bove said in a note.

FEELING PAIN

Well into the second year of a global credit crunch, Wall Street firms are really starting to feel the pain. Analysts for weeks slashed their forecasts as trading conditions grew worse, equity markets tanked and deal activity slowed to a crawl.

Investment banking revenues have plunged by a third to $600 million since the second quarter and fell by half from last year, fueled by lower demand for debt underwriting, stock issuance. Merger and acquisitions revenue was little changed from the second quarter, but it was down by half from last year.

Even investment management revenue fell by a quarter, to $600 million, reflecting a decrease in assets.

"There is concern about the viability of the whole investment banking community," said Sean Egan of independent credit analysis firm Egan-Jones Ratings Co.

Goldman and Morgan Stanley differ in their focus across equities, fixed income and commodities and the quality of their assets vary greatly. Still, Lehman's results show the trend is negative.

In every business "revenues were down on both a sequential and year-over-year basis, highlighting the cyclical slowdown that all of the large-cap brokerage firms will face," Oppenheimer analyst Meredith Whitney said in a recent note.

Across the board, the engines that powered years of record profit are sputtering.

Global debt underwriting slumped by half to $2.7 trillion, in the year ended August 31, compared with the previous year. That figure reflects the steep plunge in mortgage activity, with $140 billion of mortgage backed debt issued during this period, compared with $900 billion the year earlier.

WORST IN YEARS

Results elsewhere on Wall Street were not much better. Global equity underwriting fell by more than half, while the dollar value of announced mergers and acquisitions worldwide is down 20 percent and completed M&A fell 58 percent.

Firms also are scrambling to sell hard hit assets -- buyout loans, commercial real estate and mortgage securities -- piling on the more than $400 billion of write-downs already recorded.

The broad slowdown means even Goldman, which so far reported relatively modest losses, may not escape harm. Analysts, repeatedly slashing forecast in the past month, see earnings falling by nearly two thirds to $1.93 a share.

If the forecasts prove accurate, it would be Goldman's lowest profit since May 2005 and one of its weakest quarters since going public in 1999.

The comparisons will be only slightly kinder for Morgan Stanley, whose earnings are expected to fall 41 percent to 81 cents a share. A year earlier, Morgan suffered its first major losses of the credit crunch and poor trading results.

Excluding the disastrous fourth quarter, when it rang up $9.4 billion in mortgage trading losses, it will be the firm's weakest period since the fall of 2004. Morgan offset some of the decline by selling more of its stake in MSCI Inc (MXB.N), an index manager that has surged since its spin off last year.

"It has been a really slow period, no matter where you look," said Rose Grant, a fund manager at Eastern Investment Advisors. "These banks need the economy and equity markets to do well if they are to have any upward earnings momentum."

(Editing by Andre Grenon)