Investors hope credit crisis may bottom out
NEW YORK» The credit crisis that walloped Wall Street this year shows no signs of abating in early 2008, but investors can take some comfort in the fact that the new year brings with it a battle plan.
If the last half of 2007 is any indication, the U.S. economy will be shaky going into the first quarter. Housing continues to slump while credit markets remain tight, and that has some people wondering exactly how bad things could get next year.
The biggest difference between the summer's market turmoil and now: Wall Street knows what it's dealing with. That has analysts more confident that major financial institutions battered by the subprime mortgage crisis will see their way clear.
"What you're getting now is a rotation of the players with new chief executives, and their main priority is to not let this happen again and to fix things as soon as possible," said Chris Johnson, president of Johnson Research Group. "What you'll see over the next few quarters is more short-term pain, but at the same time, it is a damage control situation."
Johnson and other analysts believe there is no way around further financial losses as banks and brokerages shore up their balance sheets. Global banks have taken more than $105 billion worth of writedowns this year to rid their portfolios of risky mortgage-backed debt.
There's already banter among analysts that Merrill Lynch & Co. -- now under the leadership of John Thain after the ouster of Stan O'Neal -- might take up to $10 billion in writedowns when it announces fourth-quarter results in January. But, that said, there's also a feeling of relief that the situation is getting closer to a bottom.
That's not to say the big five Wall Street firms -- Merrill Lynch, Goldman Sachs Group Inc., Morgan Stanley, Lehman Brothers Holdings Inc., and Bear Stearns Cos. -- won't need to take further writedowns in the first half. Their top officers are keeping that possibility open but have become a bit more optimistic since the credit turmoil's early days.
"The situation looks a little brighter going into 2008 than going into the fourth quarter," Bear Stearns Chief Financial Officer Sam Molinaro said. "But, there's no question that risk is still out there."
Bear Stearns and other Wall Street banks have certainly taken their lumps this year, and nobody is sure how much more is ahead. But there are signs the investment banks are taking some proactive steps.
Morgan Stanley, Merrill Lynch and Citigroup Inc. have arranged for billions of dollars in foreign investments to pump up their capital. Analysts believe this shows confidence that financial institutions will work through the crisis.
Molinaro said the investment banks are also closely monitoring the impact of interest rate cuts and bailout plans introduced by the government. The Federal Reserve's series of rate cuts should encourage borrowing in 2008, while homeowners might get relief from the Treasury Department's plan to freeze some mortgage payments from resetting at higher levels.
However, it can take years for the full effects to be felt.
There's also a growing belief that the most telling signal about 2008 will come from how the stock market performs in January. Many investors have been on the sidelines during the last half of 2007, feeling neither bearish nor bullish amid concerns the U.S. might slip into a recession.