Wall Street Takes Aim at Itself

The shares of big Wall Street brokers and banks tumbled to new lows on June 26, and the firms had only each other to blame.

Many have pointed to Wall Street's love affair with ultra-risky mortgage securities as a major factor in the yearlong financial crisis, but the more immediate culprit for financial shares' plunge was the brokerages' own research arms, which have spent the past week mercilessly training their analytical firepower on each other.

The Street's analysts have produced a barrage of reports painting ever-gloomier pictures of the health of key industry players, making the big banks and brokers look increasingly like a circular firing squad.

Gravest Insult for Citigroup

On June 26, Goldman Sachs (GS) analyst William Tanona downgraded the entire U.S. brokerage industry from attractive to neutral. Goldman slashed 2008 earnings estimates for Merrill Lynch (MER) from a positive 8 a share to a loss of $3.55 per share. But the gravest insult was reserved for Citigroup (C), which was placed on Goldman's conviction sell list.

"We are hard pressed to find a catalyst that will move the group significantly higher over the next few months as fundamentals continue to deteriorate," Tanona wrote. The Goldman note appeared to be a major factor in the stock market's big sell-off on June 26.

On the same day, however, Goldman Sachs was itself downgraded by Wachovia (WB) analysts, from outperform to market perform. Goldman may be the "top name" in its industry, but analyst Douglas Sipkin points out that Wall Street firms are entering slower summer months amid rising commodity prices and new worries about the economy.

But that's only part of the recent wave of internecine opinion-mongering.

Earlier this week, Morgan Stanley (MS) was downgraded by a JPMorgan (JPM) analyst.

Downgrading the Giants

Analysts from both Credit Suisse (CS) and Bank of America (BAC) recently took aim at Merrill Lynch and UBS (UBS). On June 23, Bank of America's Michael Hecht, who previously thought the two firms would report positive earnings in the second quarter, said he now expects losses of $1 per share for Merrill and $1.70 for UBS.

On June 19, Credit Suisse downgraded its fellow Swiss rival UBS from outperform to neutral. "Management faces the challenge of rebuilding the franchise," Daniel Davies wrote. "We expect this to be a difficult job." Another Credit Suisse analyst, Susan Roth Katzke, slashed 2008 earnings estimates for Merrill on June 23 while warning the firm may have to sell its stakes in Bloomberg or BlackRock (BLK) to raise capital.

She also cut earnings estimates for Citigroup on June 24, predicting it could see losses on risky assets of $6 billion to $10 billion this quarter.

It seemed as if Merrill Lynch's rivals were ganging up on it: Amid a tidal wave of worry about the giant broker, smaller firms Sanford C. Bernstein (AB) and Buckingham Research Group also issued negative options on Merrill this week.

Street of Gloom

Yet a Merrill analyst, Edward Najarian, arguably kicked off the current wave of negativity on June 20, when he slashed earnings estimates for large banks including Bank of America, Wachovia, and Wells Fargo (WFC). He predicted Wachovia's earnings would be 50% lower than previous estimates.

Energy Stocks with Room to Run