Summer credit fears on Wall St.

By Madlen Read

June 16, 2008 7 AM PT

The Associated Press

The summer heat has hit Wall Street, and everyone’s nervous about investment banks’ financial results. Sound familiar?

At this point last year, reports were surfacing about investors bailing out of a Bear Stearns Cos. fund that bet heavily on risky mortgages. A few days later, Bear Stearns committed more than $3 billion worth of loans to keep the fund from sinking -- a move that revealed to investors how much surging mortgage defaults could cost the banks exposed to them.

Wall Street at the time called the ensuing turmoil in the debt markets the “summer credit crunch.”

Well, the summer of 2008 is at hand. And the crunch is still here.

Certainly, a lot has happened between then and now. The Federal Reserve has slashed rates and boosted lending, which has helped the debt markets recover a bit. Several banks have kicked chief executives and other high-level personnel out of the corner offices. And JPMorgan Chase & Co. bought the toppling Bear Stearns.

But credit remains tight, and investors remain anxious. Lehman Bros. Holdings Inc. is under scrutiny for making missteps similar to those made by Bear Stearns. After revealing a nearly $3-billion loss for the March-to-May period last week and then replacing its chief financial and chief operating officers, Lehman is scheduled to release its official quarterly results today.

Goldman Sachs & Co. and Morgan Stanley also report their earnings this week. Analysts predict the two investment banks will post profits for the fiscal second quarter that are much lower than last year’s. Even more telling, perhaps, will be the details within the reports. Investors are less concerned with the actual profit decline than they are with how much value the investment banks’ assets lost during the quarter.

“Everyone -- even those of us who don’t really specialize in following them -- we’re going to be looking for those write-downs. The headline number won’t be sufficient,” said Kim Caughey, equity research analyst at Fort Pitt Capital Group. “And if they have to do write-downs, the second half of that equation is: Will investors come in to recapitalize them?”

Since last year, financial services companies around the world have written down the value of their various debt-related holdings by more than $240 billion. As a result, many banks -- including Citigroup Inc. and Merrill Lynch & Co. -- have sold stakes to outside investors to raise extra cash.

The stock market is not as volatile now as last summer. Instead of plunging, the Dow Jones industrial average has been wavering back and forth, with investors unsure about the direction of the economy.

Last week, the Dow finished up 0.8%, but the Standard & Poor’s 500 index ended down 0.8% and the Nasdaq composite index closed 0.1% lower.

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At a glance

Today

Quarterly earnings reports

are expected from Adobe Systems and Lehman Bros. Holdings.

Tuesday

Commerce Department reports on housing starts.

Labor Department reports on producer price index.

Federal Reserve reports on industrial production.

Quarterly earnings reports due from Best Buy and Goldman Sachs Group.

Wednesday