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Credit Concerns Hit Big Banks in a Big Way

PAUL KANGAS: Citi downgraded nine U.S. banks today on continued credit concerns. Even big banks were impacted. Citi cut Bank of America, JPMorgan Chase and Wachovia from "buy" to "hold." The move comes as investors prepare for a series of bank earnings that could shed some light on just how bad the credit losses are at the nation's biggest investment banks. Scott Gurvey reports.

SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Wall Street expects bad news from the big investment banks as they report fourth quarter earnings this week. The only question is: how bad? First up will be Goldman Sachs, reporting tomorrow. Goldman is expected to be the least impacted by the collapse of the sub-prime mortgage market because the company bet on just such a possibility. But Morgan Stanley which reports Wednesday, announced in November it took a $3.7 billion write-down for sub- prime loses in the first two months of the quarter. And Bear Stearns, which reports Thursday, told the Street in November to expect a $1.2 billion hit for sub-prime loans and it will report a loss for the quarter. Brokerage analyst Ryan Lentell of Morningstar says investors will be hoping there are no surprises in these earnings numbers.

RYAN LENTELL, BROKERAGE ANALYST, MORNINGSTAR: It's really tough to tell because the hedges that these firms have in place, how well they held up as the market has deteriorated. Since Bear Stearns and Morgan have announced that their -- what they expected the charges to be, the ABX index which tracks mortgage-backed securities, sub-prime mortgage backed securities, has stabilized. So it could be -- I would expect it to be relatively in line with what they predicted earlier in the quarter.

GURVEY: Investors will also be looking for signals the fourth quarter write-offs are the last but analysts are not optimistic. Alec Young of Standard & Poor's expects additional charges to be taken well into next year.

ALEC YOUNG, GLOBAL MARKET STRATEGIST, STANDARD & POOR'S: What we've seen after the third quarter write-downs was there was more to come in the fourth quarter. At this point, investors have certainly braced themselves for a lot of bad news with regards to write-downs at these companies. However, with the housing market continuing to weaken and the value of the CDOs continuing to decline, we think there continues to be risk to the downside.

GURVEY: Young says the stock market's poor performance recently is because investors are anticipating lower earnings forecasts, both for the financial sector and for companies in general in 2008. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.