Broker Earnings Estimates Cut by Oppeheimer

Oppenheimer cut its earnings estimates on some U.S. brokers based on its outlook on the capital markets and sizable estimated revenue reversals due to an accounting rule that lets companies elect to use fair value for certain assets and liabilities.

"We expect that most of the gains booked in the first quarter will be reversed in the second quarter," analyst Meredith Whitney said in a note to clients.

The Financial Accounting Standards Board (FASB), which sets accounting rules in the United States, adopted a fair value option in February 2007 that allows companies to irrevocably choose to record the value of certain financial instruments on their balance sheets based on what that instrument could be traded for in a current market transaction.

Under the rule, losses on securities can be recognized against retained earnings rather than current earnings.

Over the past three quarters reported, the spreads on the credit default swaps for the banks and brokers have widened due to the credit turmoil and liquidity concerns that affected the industry, Whitney said.

Whitney also said valuation multiples will remain at current levels but are more likely to deteriorate further as the outlook for the group is far more bleak than that reflected in the market.

"Companies that adopted fair value accounting on their own company debt were able to realize gains as a result of the widening of company credit spreads," she added.

The brokerage cut its estimates on Goldman Sachs, Lehman Brothers, Merrill Lynch

and Morgan Stanley .

Shares of Goldman Sachs were trading down $1.19 at $190.89 and that of Lehman Brothers were down nearly 29 cents at $44.43, before the bell on the New York Stock Exchange.

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