'Ugly' Quarter Ahead for Goldman, Morgan Stanley

Wall Street analysts expect a tough fourth quarter for Goldman Sachs and Morgan Stanley, laden with significant write-downs amid challenging global markets.

The quarter will prove to be "ugly" for the companies, J.P. Morgan Securities analyst Kenneth Worthington said and forecast gross write-downs of about $3.5 billion at Goldman Sachs and about $5.5 billion at Morgan Stanley.

Morgan Stanley , however, will benefit by about $4 billion due to the widening spread on its own debt, he said. This is more than the $0.5 billion benefit the analyst expects at Goldman.

Fox-Pitt Kelton's David Trone and Merrill Lynch's Guy Moszkowski were the latest to cut their outlook on the two former investment banks, reflecting continued price correction across many asset classes through November.

Goldman has been widely expected to post its first quarterly loss since going public in 1999.

Poor market conditions got even worse last month as the U.S. Treasury abandoned its proposal to buy hard-to-trade mortgage securities and other debt from hard-hit banks.

In spite of the tough operating environment, J.P. Morgan's Worthington said he expects Goldman to perform better in the longer term due to "a superior culture and ability to alter its business mix." He rates the stock "overweight."

Goldman has numerous attractive investment opportunities including various distressed and underpriced assets, he said.

Worthington said he expects Goldman to use any 'bank' acquisition to build high net worth or commercial relationships.

"We expect both GS and MS to be opportunistic in growing their deposit franchises," he said.

More Write-Downs, Big Losses

Over the past month, several analysts have forecast a loss at Goldman and Morgan Stanley on the back of deteriorating global capital markets.

Worthington widened his fourth-quarter loss estimate on Goldman to $5.14 per share from 58 cents a share.

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He forecast a loss of 46 cents a share for Morgan Stanley, compared with his previous view of a profit of 28 cents per share.

Last week, prominent banking analyst Meredith Whitney said U.S. banks will incur about $44 billion in write-downs and loss provisions in the fourth quarter, adding that much of the U.S. Treasury capital will be diverted to plug holes on their balance sheets.

Since the summer of 2007, Wall Street has been hammered by a sharp pullback in debt markets, which began with mortgage woes and escalated into a credit crisis, slowing economic activity around the world.

Fox-Pitt's Trone said he now expects Morgan Stanley to write down $2.8 billion in the quarter, compared with his prior estimate of $2.4 billion.

Merrill's Moszkowski said, "While it appeared that through October Morgan Stanley could remain profitable, the market decline in credit and mortgage products in November makes this very unlikely."

He cut his share-price target to $21 from $25, and maintained his "buy" rating on the stock.

Shares of Morgan Stanley were down at under $12 in morning trade Wednesday on the New York Stock Exchange, while those of Goldman were up at above $65.

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