Oppenheimer & Co. analyst Meredith Whitney predicts the credit crisis gripping financial companies is "far from over," and believes losses could be far worse than even the most pessimistic estimates suggest.
In a research report issued late Monday, Whitney forecast that the credit crisis could extend well into 2009 and perhaps beyond.
Banks are now reversing revenue they never should have booked in the first place, she said. A lot of this revenue, through instruments like bonds backed by mortgages, was posted under the assumption that home prices would escalate in perpetuity.
Now that banks are realizing home prices can fall, the projected revenue pivoting on that assumption has turned into losses. Whitney said this problem was compounded by banks relying on "leverage" to bolster this revenue, meaning borrowing money to place bigger bets on mortgages. This left little room for error.
She expects the banks she covers to set aside $170 billion to cover unpaid loans after years of "inherently flawed underwriting." Losses could be "far worse than even the most draconian estimates," she said.
Separately, Lehman Brothers analyst Roger Freeman cut his profit estimate for Morgan Stanley. He now expects the investment bank to earn $4.72 per share this year, well below his previous estimate of $5.16 per share.
Analysts polled by Thomson Financial forecast profit of $5.25 per share, on average.
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