Nightmare on Wall Street continues

Goldman Sachs and Morgan Stanley brace for another bad quarter following abysmal performances across their various businesses.

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By David Ellis, CNNMoney.com staff writer

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Right now, analysts are betting that Goldmans Sachs will book a loss of just over $900 million when it reports fourth-quarter results later this month.
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Shares of Goldman Sachs and Morgan Stanley have plunged this year due to massive turmoil in the financial markets and a weak global economy.

NEW YORK (CNNMoney.com) -- The hits just keep on coming for Wall Street.

Later this month, the once venerated investment banks Goldman Sachs (GS, Fortune 500) and Morgan Stanley (MS, Fortune 500) will reveal their results for the fourth quarter and full year.

Neither firm has set a date for the reports, but most industry trackers are betting the numbers will be abysmal, particularly for Goldman Sachs.

A growing number of analysts have slashed their estimates for the New York City-based bank in recent weeks, saying they expect it to report a loss of about $900 million, or $1.82 a share, its first loss ever since the company went public in 1999.

A month ago, analysts anticipated the company would report a profit of $2.35 a share, according to Thomson Reuters.

And there are concerns that the losses could be even higher. Credit Suisse analyst Susan Roth Katzke warned earlier this week that Goldman Sachs could book a quarterly net loss of as much as $4 a share.

Morgan Stanley, on the other hand, is expected to remain in the black, booking a profit of nearly $94 million, or just 3 cents a share. Even though that is a dramatic reversal of last year's $3.59 billion loss - a first for the firm - analysts have also steadily cut their earnings estimates for the company in recent weeks. The consensus estimate was for a profit of 58 cents a share a month ago

"There is really not that many good things to say about the quarter," said Ada Lee, senior analyst at Sterne, Agee & Leach.

Tough times for the industry

In the months since these two firms last reported quarterly results, Wall Street and the broader financial services industry, have entered one of the most difficult operating environments in history.

The collapse of Lehman Brothers and a drought in short-term funding sources, considered crucial for investment banks, prompted both Goldman Sachs and Morgan Stanley to convert into bank holding companies.

Since then, both firms have taken a hard look at how to attract more deposits as a way of boosting capital. Morgan Stanley is said to be looking at potential regional bank acquisitions and has hired two retail banking veterans to help with those efforts. Goldman, on the other hand, is considering launching an Internet banking operation, a source confirmed to CNN. News of the online bank was originally reported in The Wall Street Journal Wednesday.

Goldman and Morgan have taken other steps to insulate their position during the quarter. Both firms announced plans to raise capital by selling stock. In exchange for $5 billion, Goldman Sachs sold preferred stock to Warren Buffett's Berkshire Hathaway (BRKA, Fortune 500) in late September.

Morgan Stanley quickly followed that up with a deal that allowed the Japanese financial firm Mitsubishi UFJ to take a 21% stake for $9 billion.

But other measures, including the Treasury Department's decision to inject $10 billion of capital in each firm as part of the $700 billion rescue package, have done little to halt the painful selloff in both firms' stock.

Shares of Goldman and Morgan have lost close to a third of their value each in the last month alone, and are down 69% and 79% so far this year.

A quarter full of challenges

One of the most pressing concerns for investors has been the underlying health of some of their most important businesses.

Equity underwriting and their respective advisory businesses remain quite sluggish for both firms, eliminating a key source of revenue. Industry trackers have also pointed to a decline in fixed-income activity as a drag on profits. Plunging commodity prices and stock market volatility could also have a major impact on the results of their trading desks this quarter.

At the same time, both firms have announced moves to cut back on staffing levels in recent weeks, which will likely result in severance charges this quarter.

But what may be the biggest driver of this quarter's dreary numbers is the declining value of many of the assets that remain on both companies' books.

Each firm still has massive portfolios layered with securities that have tumbled in value in recent weeks, such as those backed by residential and commercial real estate.

It hasn't helped that institutional investors' appetite for these securities has frittered away, notes David Killian, a fund manager at Valley Forge Advisors LLC in Malvern, Pennsylvania.

"When you hold securities [that] history has proven are safe investments and the market walks away from them, prices drop pretty darn fast," said Killian, whose firm oversees $480 million in assets and owns shares of both Goldman and Morgan.

But some of the problems that Goldman and Morgan suffer from are unique to their institutions.

Analysts expect Goldman to take a hit as a result of its equity stake in Industrial and Commercial Bank of China. Shares of the Chinese bank have lost close to a third of their value through November.

Morgan Stanley, on the other hand, will probably report signs of trouble in its asset management and global wealth management businesses due to the broader market turmoil, warned Lee of Sterne, Agee & Leach.

Unfortunately, investors will have to live through all of this again in January. As a result of their conversion to a bank holding companies, both Goldman and Morgan will have to report fourth-quarter earnings again that month, even though those results will only reflect the month of December. To top of page

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