Lehman chops estimates on Goldman Sachs (GS) and Morgan Stanley (MS) on:
- expected reversal of structured debt gains resulting from tightening credit spreads,
- inventory valuation adjustments, and
- hedging losses.
FQ2: $3.75 to $3.18
FY2008: $15.60 to $15.04
Morgan Stanley Ests:
2Q08 $1.31 to $0.87
200b: $5.16 to $4.72
we are making three sets of adjustments with this note. First, credit spreads have tightened
meaningfully during the quarter, resulting in a reversal of structured debt gains that the brokers have taken during the prior three quarters. This should not come as a surprise to the market as we have already been building in structured debt losses in 2Q since our prior note in early April and each of the brokers have in the past telegraphed that these gains would reverse when broker credit spreads compressed again.
The second set of adjustments are inventory valuation adjustments including a smaller Alt-A writedown and slightly larger leveraged loan portfolio gain than we had previously modelled. The final set of adjustments we are making with this note are hedging losses due to negative basis movements during the quarter. This past quarter we have seen a meaningful dislocation between cash and derivative prices across several assets classes including commercial mortgages, leveraged loans and corporate debt. We believe that the brokers will incur hedging program losses due to this basis risk.