Citi, Merrill Lynch and JP Morgan could see writedowns totalling $33.6 billion relating to collateralised debt obligations (CDOs) over the fourth quarter, according to a report by Goldman Sachs on American firms, published on December 26.Goldman increased its writedown predictions to $18.7 billion for Citi (up from a previous estimate made on November 19 of $11 billion), $11.5 billion for Merrill Lynch (up from $6 billion), and $3.4 billion for JP Morgan (up from $1.7 billion).
“Although we believe we are being fairly aggressive in our estimates, they appear to be consistent with market prices and recent marks from other participants that have already reported fourth-quarter 2007 results,” wrote William Tanona, analyst at Goldman Sachs in New York.
The report said revenues in fixed-income, currency and commodities (FICC) businesses are likely to be under significant pressure for the quarter. Goldman believed writedowns will be much larger than investors are anticipating and strong results in markets such as foreign exchange, rates and commodities will not be enough to offset the dismal credit businesses. Banks might still feel some of the lingering effects of the credit crisis over 2008.
“Although we have seen many firms take the appropriate actions in recent weeks as they relate to writedowns and capital raises, we still believe it will be a couple of quarters before the current credit crisis is fully digested by the markets,” wrote Tanona.
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