August 28, 2008 / 3:17 PM / 10 years ago

UPDATE 1-Goldman, Lehman, MS to writedown $6.1 bn in Q3:Fox-Pitt

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Aug 28 (Reuters) - Goldman Sachs (GS.N), Lehman Brothers LEH.N and Morgan Stanley (MS.N) may report a small sequential drop in third-quarter write-downs, helped by hedging gains, according to an analyst at Fox-Pitt Kelton.

Analyst David Trone wrote in a note to clients that he expects the three firms to together write-down $6.1 billion on their “problem assets” across leveraged loans, and commercial and residential mortgages.

They reported $6.9 billion in write-downs in the second quarter, due in part to losses from ineffective hedges.

However, Trone forecast third-quarter composite revenue of $13.0 billion for the banks, down 15 percent from second quarter and down 47 percent from the year-ago quarter.

Excluding write-downs in the second and third quarters, he said revenue forecast still reflects a 14 percent fall from second quarter, reflecting slower activities across business lines.

They faced new challenges with the sharp decline in global equity markets, seasonal weakness in customer flows in July and August, and ARS-related settlements with government bodies, Trone said.

Earlier this month, Morgan Stanley agreed to pay a $35 million fine and buy back $4.5 billion of auction-rate debt by Dec. 11, while Goldman Sachs said it will pay a $22.5 million fine and buy back about $1.5 billion of such notes by Nov. 12.

“Cyclical weakness and uncertainty over composite members’ balance sheets are not going away anytime soon,” Trone said. “On the other hand, the valuation risk/reward in the group is quite compelling for longer-term investment horizons.”

“As a practical matter, we see short-duration mini-rallies coming and going, but we doubt that a definitive, sustained upside breakout is looming,” he added.

Shares of Lehman and Morgan Stanley were trading almost flat at $14.72 and $39.29, respectively, while Goldman shares were trading up almost 2 percent at $158.22 in morning trade on the New York Stock Exchange. (Reporting by Ratul Ray Chaudhuri in Bangalore; Editing by Anil D’Silva)

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