Wall Street's biggest firms, battered by the breakdown in mortgage and other debt markets, say there's money to be made among the wreckage.
Oliver P. Quilla for CNBC.com
New York Stock Exchange (NYSE)
Goldman Sachs , Morgan Stanley and Lehman Brothers reported sharply lower quarterly profits last week as the credit crunch slammed the value of a widening range of mortgages, corporate loans and other assets.
And while the firms' chief financial officers warned that markets would remain choppy for some time, the executives all made the same point: The forces keeping prices down won't last.
"Many assets are being priced by the market at levels which are significantly below the levels that would stem from a fundamental valuation approach," Goldman CFO David Viniar told investors on a conference call. He blamed the depressed prices on "technical contagion" that eventually will abate.
"If we see good opportunities, we would absolutely take advantage of them," he said, though he declined to give specifics.
The abrupt end of the U.S. housing boom last year triggered a pull-back by investors across many debt markets. Owners of subprime mortgages, loans backing corporate buyouts and exotic debt instruments were forced to mark down the value of those assets because buyers are few and far between.
Nearly $200 billion of value has evaporated among banks worldwide, gutting profit and forcing some, like Bear Stearns , to throw in the towel. Wall Street banks have also been on the defensive, hoarding cash and conserving capital.
Yet the message from the Wall Street CFOs indicates these banks are ready to place some bets.
"They told us the market will be difficult yet there is gold underneath all of this," said Erin Archer, who analyzes financial stocks for Thrivent Financial for Lutherans, a money manager with $75 billion in investments. "It just takes investor patience and management patience to bring it out."
Turbulent markets have dented Wall Street. Goldman last week reported $1 billion of mortgage losses and more than $1 billion in net credit markdowns. Lehman said falling securities
prices slashed results by $4.7 billion in the first quarter.
But Lehman, like Goldman, said tough times could yield some lucrative trades and investments.
"We look at the mark-to-market adjustments as more temporary in nature," said Lehman CFO Erin Callan. The steep decline of mortgages and loans has been "driven by many technical factors, which may not reflect intrinsic value," he said.
Callan, in her conference call, said the bank has bought up some residential mortgages in recent months, including below-prime "Alt-A" mortgages hard hit by the recent credit crunch.
On Monday, money manager BlackRock, hedge fund Highfields Capital Management and former executives of Countrywide Financial launched a company to acquire distressed
residential mortgage loans.
Goldman, which last year bought Litton Loan Servicing from C-BASS, has launched several funds to purchase distressed debt and says it is open to pursuing more deals in mortgages.
Investment banks also are still wrestling with a glut of leveraged loans after the buyout boom came to halt last summer.
With leveraged loans selling at a steep discount to par, a number of private investment firms and banks have raised funds to buy this debt at distressed prices.
"From a technical perspective, sentiment has been particularly bearish," Morgan Stanley CFO Colm Kelleher told analysts. "However, there's been some evidence of non-credit players buying into the credit asset class." He did not elaborate.
While Kelleher cited opportunity in the markets, he said his own bank, stung last year by $9.4 billion in mortgage trading losses, intends to continue "sailing close to shore."
"There is a world where we could opportunistically put up the balance sheet if the opportunities really present themselves on a risk-adjusted basis and make sense," Kelleher said. "That's not our intention."