Analysts slash bank estimates

With the credit crisis showing no signs of abating, analysts have slashed their once optimistic third-quarter estimates for U.S investment banks. The banks' strength is vital to the financial sector and the economy. The more cash investment banks use to cover their own losses, the less they can use to finance all kinds of businesses.

Lehman Brothers Holdings, Goldman Sachs Group and Morgan Stanley are all likely to take further write-downs for the quarter ended Aug. 31 as the value of toxic mortgage-backed securities continued to fall in August. Financial-services firms have already racked up more than $300 billion in write-downs since the middle of 2007.

Citi Investment Research analyst Prashant Bhatia estimates Lehman will take $2.9 billion in write-downs, Goldman Sachs will take $1.8 billion, and Morgan Stanley will take $1.7 billion. Lehman Brothers' very survival as an independent firm might be at stake if the No. 4 U.S. investment bank can't come up with fresh capital to shore up its balance sheet. Korea Development Bank has said it is in discussions to lead a consortium of banks to purchase a stake in Lehman.

Jeff Harte, an analyst with Sandler O'Neill, expects Lehman to lose $2.50 a share when it reports third-quarter results. Lehman's stock has fallen 69 percent this year and Harte thinks further write-downs could lead to more selling.

"We have trouble envisioning investor fear subsiding until Lehman's problem asset portfolios are substantially reduced," Harte writes in a research note.

Aside from further write-downs, Morgan Stanley and Goldman Sachs will likely record charges from a settlement with the New York attorney general and other state regulators over the repurchase of auction-rate securities. The market for the once-liquid assets collapsed in February amid the broader downturn in the markets.

The settlements require the banks to repurchase the securities and pay fines. Harte estimates Goldman Sachs will earn $1.92 a share in the third quarter, down from a previous estimate of $3.63 a share, partly due to the auction-rate settlement. Goldman Sachs will repurchase $1.5 billion of securities and pay a fine of $22.5 million.