Even after the record $8.4 billion write-down for bad debts at Merrill Lynch & Co., the unprecedented ouster of three chief executives within five months and the elimination of $84 billion of market value at the five largest securities firms, Wall Street still is poised to report its second-most profitable year.
And 2008 may be better.
"As the bombs are dropping and the mines are exploding, it's a bit of a surprise," said Kenneth H. Crawford, who helps oversee $950 million Argent Capital Management LLC, of St. Louis, which holds Morgan Stanley and Merrill shares.
The collapse of the subprime mortgage market derailed the careers of Merrill Chief Executive Officer E. Stanley O'Neal, Citigroup's Charles O. Prince III and UBS AG's Peter A. Wuffli. Together, those companies accounted for about 60 percent of the $45 billion in write-downs reported by the world's biggest banks and securities firms so far this year. The industry also has cut 10,000 jobs.
Despite the losses, Goldman Sachs Group Inc., Merrill, Morgan Stanley, Lehman Brothers Holdings Inc. and Bear Stearns Cos. will earn a combined $28 billion this year, down 8.3 percent from the record $30.6 billion in 2006, according to a survey of analysts by Bloomberg News. Analysts estimate the firms' net income will reach $32 billion in 2008.
Goldman and Lehman will report their highest earnings ever this year, while profits will drop 42 percent at Merrill, 34 percent at Bear Stearns and 6 percent at Morgan Stanley. In 2008, analysts predict all the firms except Goldman will post higher profits. Goldman, led by CEO Lloyd Blankfein, will earn a Wall Street record $11 billion this year and then $10.5 billion in fiscal 2008, analysts estimate.
"When you look to next year, you're back to earning money once these write-downs are taken," said Benjamin B. Wallace, who helps manage $750 million at Grimes & Co. and owns Merrill and Morgan Stanley shares.
While revenue from fixed-income sales and trading is declining for most securities firms during the credit market turmoil, fees from investment banking, providing brokerage services to hedge funds and trading stocks are increasing, Bank of America analyst Michael Hecht wrote in a Nov. 5 report.
A record $3.6 trillion in mergers and acquisitions were announced this year, average daily trading on the Nasdaq stock exchange rose 10 percent, and equity market price swings measured by the Chicago Board Options Exchange SPX Volatility Index surged to the highest since 2003, creating trading opportunities.
