Banks face one-two credit punch

By Tim McLaughlin - Analysis

NEW YORK (Reuters) - Wall Street and big U.S. banks should be wary of cash-strapped consumers. And they should not relax after writing down the value of leveraged loans and other assets by billions of dollars.

Some analysts say more whopper write-downs are coming.

Hit hard by an evaporating market for the corporate debt that fueled a globe-girdling buyout boom, U.S. banks now look forward with trepidation at escalating problems, such as consumers missing payments on their automobiles and credit cards. The consumer safety cushion, raising cash by refinancing their mortgages, is losing air as banks restrict lending more and more while adjustable-rate loans reset at higher interest rates.

Bernstein Research analyst Brad Hintz said it was the worst fixed-income sales and trading quarter for four of the five largest U.S. security firms in nearly a decade. Bear Stearns Cos Inc BSC.N, Lehman Brothers Holdings Inc. (LEH.N: Quote, Profile, Research, Stock Buzz), Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz) and Merrill Lynch & Co Inc (MER.N: Quote, Profile, Research, Stock Buzz) combined for billions of dollars in write-downs of their portfolios.

Some analysts are skeptical that such a significant credit crisis can be worked through in just a quarter or two.

"There will be further write-downs of portfolio holdings," said Keith Davis, a financial analyst at portfolio manager Farr Miller & Washington.

The confluence of shriveled demand for corporate debt and consumer debt problems has set the stage for a one-two punch. That could knock Citigroup (C.N: Quote, Profile, Research, Stock Buzz) Chief Executive Chuck Prince out of a job and smudge the shine on the rising star of JPMorgan Chase & Co (JPM.N: Quote, Profile, Research, Stock Buzz) CEO Jamie Dimon.

"You are looking at a situation where banks are under-reserved for the losses that are out there," Davis said.