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To: D.Austin who wrote (905)	10/26/2002 11:25:19 AM
From: D.Austin	Respond to of 1116

October 25:Corporate Risk - Risks Lie Ahead For Major US Financial Firms Due To Q3 Slowdown Major US financial firms like Goldman Sachs Group, Morgan Stanley, Lehman Brothers Holdings and Bear Stearns faced difficult business conditions in the third quarter, as the summer holiday season lead many investors and businesses to refrain from making decisions and deals. But there are bigger risks lying ahead stemming from the quarter’s slowdown. While the equities business maintained its sluggish pace, analysts and investors were spooked by a summer drop-off in bond operations. Record fixed-income issuance early in the year had helped to offset weak stock underwriting and trading. "Very few parts of the business were working very well during the third quarter," said Reilly Tierney, an analyst at Fox-Pitt, Kelton. "That would be a very ominous trend for the group, if the fixed-income markets were unreliable for the remainder of the year." Brokerage analysts have been steadily trimming their earnings estimates, and a recent Securities Industry Association (SIA) report said profits won't rebound until next year. "As all of us are painfully aware, investor confidence has been battered," Merrill Lynch President Stan O'Neal said, adding that investors were shaken by recent accounting scandals and corporate governance concerns. "The end result is like a wrench being thrown into the gears of the economy," he said. And into the spokes of Wall Street's businesses. Money raised by initial public offerings, which carry fat fees of 7 percent of the deal's value, were less than half a year ago, while lucrative merger and acquisitions were few. Exacerbating matters was the fixed-income slowdown, as investors worried about the US economy and corporate honesty flocked from corporate bonds to safer government debt, and sent yields on benchmark US Treasuries to 40-year lows. There were only 24 initial stock offerings in the quarter, raising $7.0 billion, according to Thomson Financial Securities Data. That compared with 36 companies selling $14.9 billion in new stock a year ago -- and pales in comparison with the $22.3 billion in IPOs in the fourth quarter of 1999, a record quarter for issuance. Mergers and acquisitions activity slumped as low stock prices meant companies couldn't use their shares to make acquisitions. M&A volume fell 34 percent to $151.7 billion, miles away from the record $676.3 billion in volume during the second quarter of 1998. The industry has already slashed 54,000 jobs since the beginning of 2001, according to the SIA. But many believe 727,000 securities industry professionals is still too many. "We expect more head-count reductions -- mostly at year-end," Credit Suisse First Boston analyst Joan Solotar said in a research note on Wednesday, when she lowered her profit estimates for Morgan Stanley, Bear and Lehman. Lehman has already indicated it will cut jobs, though it is not saying how much. "The third-quarter earnings disappointments, and perhaps a less-than-robust bounce in the fourth quarter would definitely put pressure on the companies to make more significant moves on the head-count side," Tierney said. What really has analysts and investors worried is the falling amount of debt issuance, which had bolstered Wall Street profits during the two-year bear market for stocks. Companies had been flocking to sell bonds as low interest rates meant they could borrow money on the cheap. Total US debt offering volume fell to $447.7 billion in the three months ending Aug. 31, down nearly 13 percent from a year ago. Corporate bond and convertible securities issuance in July and August fell 70 percent or more off their pace in the first half of the year. If bond underwriting dries up and stock offerings don't pick up the slack, investment banks will be in real trouble. Source: RiskCenter.com garp.com