Goldman Sachs: More Writedowns Across the Financial Spectrum

In news that is a surprise to no one reading this blog for more than a week, and in fact we've been predicting since the day of the last major round of "kitchen sink writedowns", more are coming down the pike per Goldman Sachs. Further, also as predicted long ago, these won't have as much to do with subprime as all the other parts of the credit chain. As I've been stating, subprime is the tip of the iceberg and simply a symptom of the disease; not the disease itself. Although it is conveniently blamed by those in power i.e. "if not for those subprime people..." Look for some of their former CEOs on Capital Hill this week. d

The infection will move up the food chain to alt A mortgages, to prime mortgages, and then across to other parts of credit - student loan, auto loan, personal loan, commercial loans, and credit cards. These are the things they are going to be writing down the coming year. Why this is a surprise to anyone is beyond me... but I am sure someone is aghast at this 'surprising news'. Probably someone who watched CNBC all day and listens to the seals clapping.

But remember, WAY back last August we were told "THIS" was the kitchen sink quarter by both the companies and the financial press. Never forget that as this plays out and the hypocrisy is shown. At the time (and I'm not financial expert, simply someone with a brain still intact within the skull), I was writing we have an entire house full of sinks, and sinks will be found in rooms we did not even know existed. That will be the story of 2008; and why all earnings estimates for these companies for 2008 are a complete waste of time, and anyone telling you financials are cheap on 08 estimates needs to be put into a straight jacket or at least needs to stop managing money. And can I just say, Citigroup (C) is simply an unmitigated disaster.

Also, as I've been stating, we're going to see another round of foreign infusion - in fact we must for some of these companies to remain going concerns. Or the Fed will literally be forced to buy the junk right from the banks themselves so they can maintain capital ratios. Either or.

• Analysts at Goldman Sachs cut estimates for the nation's top banks and brokers Monday and said these major institutions would likely report write-downs of between $1 billion and $12 billion for soured real-estate loans and related exposures.
• Goldman's estimates of new write-downs ranged from $1.4 billion it expects for Bear Stearns Cos. all the way up to a whopping $12 billion projected for Citigroup Inc.
• "Although many of the write-downs in the back half of 2007 focused primarily on subprime and CDOs, we expect first-quarter 2008 write-downs to be spread across all aspects of residential mortgage-backed securities including subprime, Alt-A and prime, commercial mortgage-backed securities and leveraged loans. We forecast first quarter write-downs of approximately $1 billion to $12 billion for each of our large-cap companies across all of these categories," the Goldman analysts concluded.
• On Citigroup (C) - "Our new estimate assumes about $12 billion of additional write-downs across leveraged loans, residential mortgage-backed securities and commercial mortgage-backed securities. We believe write-downs from its asset-backed CDOs will account for the largest percentage of the overall write-down. Citigroup has also been one of the least aggressive in terms of its write-down of these assets, in our view," Goldman's analysts said.
• On JP Morgan (JPM) - "Our new estimate assumes about $3.4 billion of additional write-downs across leveraged loans, residential mortgage-backed securities and commercial mortgage-backed securities as well as our assumption for no private-equity gains in the quarter (previously we assumed about $700 million in gains) based on most recent management guidance," Goldman concluded.
• On Bear Stearns (BSC) - "Our new estimate assumes about $1.4 billion of additional write-downs across Bear's portfolio (although the primary drivers are likely to be from Alt-A and commercial mortgage-backed securities). Absent these write-downs, our forecast would have still had earnings down 10% year over year, a clear indication the firm is suffering from a global slowdown in mortgages," Goldman said.
• On Lehman Brothers (LEH) - "Our new estimate assumes about $3.5 billion of additional write-downs across leveraged loans, residential mortgage-backed securities, and commercial mortgage-backed securities. Lehman has the largest absolute commercial mortgage-backed securities exposure of the group at $40 billion, and we expect this asset class to contribute close to half of the write-downs this quarter," the Goldman analysts said.
• On Morgan Stanley (MS) - "Although Morgan Stanley will likely have some meaningful negative valuation adjustments this quarter on leveraged loans and commercial mortgage-backed securities, we do not believe the firm will be as impacted as some peers as it appears that the firm was more aggressive on its subprime write-downs last quarter, it has less Alt-A exposure than some of its peers, and its commercial mortgage-backed securities portfolio is more of an international concentration, which has been less impacted than the U.S., in our view. "Our new estimate assumes about $3.1 billion of additional write-downs across leveraged loans, residential mortgage-backed securities and commercial mortgage-backed securities," Goldman concluded.
• On Merrill Lynch (MER) - "Our new estimate assumes about $4 billion of additional write-downs across leveraged loans, CDOs and commercial mortgage-backed securities. We also assume a smaller write-down on the firm's remaining Alt-A and subprime residential mortgage-backed securities portfolios. Merrill was one of the more aggressive firms in writing down its CDO exposure in the fourth quarter of 2007," Goldman said.

This will most likely be the quarter even likely Goldman Sachs might need to do a writedown or if nothing else bring expectations for 2008 down quite a bit.

And after these writedowns, the companies will insist (for the 5th time I believe already) that this is indeed the kitchen sink quarter and then analysts will come onto CNBC and cheer and clap and tell you financials are so dirt cheap and the Fed is printing money and you need to buy these stocks because we can't fight the Fed and everything will be fine in 6 months.

You will continue to ignore these people. Why? They said the same thing last August. Eventually they are going to be correct, as all blind squirrels are. But entire lines of business are disappearing for these companies and once again, without home prices stopping their fall and the consumer shielded from real inflation and cost of living stress, none of these things improve in the near term.

Disclosure: No positions