Subprime and Wall Street's painful December

By Tim McLaughlin - Analysis

NEW YORK (Reuters) - Last December's profit feast on Wall Street has turned into a bowlful of mush.

Fiscal fourth-quarter results that will be reported over the next two weeks by Goldman Sachs Group Inc (GS.N), Lehman Brothers LEH.N, Bear Stearns Cos Inc BSC.N and Morgan Stanley (MS.N) are sure to sap Wall Street's holiday cheer. Unlike the third quarter, the full brunt of the credit crisis rattling the globe will be reflected.

Bear Stearns and Morgan Stanley are expected to lose money because of big write-downs on subprime-related securities. Meanwhile, analysts have cut outlooks for Goldman and Lehman.

The four companies last December reported combined net income of $6.9 billion. During year-ago conference calls, only Bear Stearns was grilled about subprime exposure, reflecting how unprepared analysts were for a crisis that would spread throughout Wall Street and the global economy.

"There will be no great Christmas on Wall Street this year," said Meg McMullen, president of New England Research & Management, which manages about $200 million.

Even as subprime defaults escalated throughout early 2007, Wall Street's biggest investment banks convinced investors their exposure to the risky loans was limited.

The conventional wisdom offered by executives was that even though their companies repackaged subprime loans and sliced them up into lucrative securities, they eluded risk because they sold them to institutional investors.

How wrong they were.

Some of the architects of the subprime mortgage crisis now face mega-write-downs, net losses and more high-profile ousters of top executives. Already gone from the CEO suite are Merrill Lynch's Stan O'Neal and Citigroup's (C.N) Chuck Prince.

And the problems are not contained to Wall Street. Subprime borrowers are losing homes so quickly that the White House wants to bail them out. UBS analysts estimate the potential cost of the U.S. subprime-related crisis at $605 billion for American and European banks.

Some analysts said they don't expect a recovery until the second half of next year, or not until Wall Street cleanses balance sheets loaded with subprime mortgage-related assets.

BOTTOM?

"We anticipate that timing to be nearer to the second half of 2008 than the first," CIBC investment banking analyst Meredith Whitney said in a research note.

Analysts cannot call the bottom of the crisis because Wall Street firms themselves are struggling to figure out the value of assets underpinned by subprime mortgages.

Multibillion dollar reductions in the value of collateralized debt obligations are expected in the fourth quarter and early 2008.