Throughout this year, Wall Street's so-called experts have argued that the subprime problem was "contained," or have repeatedly called for a bottom, or have suggested that the Federal Reserve would wave its magic wand and somehow make America's myriad financial problems disappear.
Meanwhile, the shares of most financial firms have been sliding, both in absolute terms and relative to the overall market, as investors discounted all sorts of bad news to come. That was real money being wagered on what would happen down the road, unlike the rose-colored fantasies being spun by analysts, strategists, and pundits who haven't quite figured out how things work in the real world.
In "E*Trade, Bank of America Forecast Damage From Subprime Fallout," Bloomberg reports on developments that lend some credence to the idea that the flow of money out of (or into) a sector often provides a far better guide to the future than anything the paid prognisticators have to say.
E*Trade Financial Corp. slashed its profit forecast by 25 percent and Bank of America Corp. warned that market turmoil will have a ``meaningful impact'' on earnings, as fallout from the subprime-mortgage crisis spread further into the nation's financial system.
Bank of America's trading revenue has been hurt by ``unprecedented dislocations'' in leveraged finance, subprime mortgages and commercial paper, Chief Financial Officer Joe Price told investors at a conference in San Francisco. E*Trade, which last month defended the quality of its mortgage portfolio, now said it expects losses on those loans. The New York-based online brokerage also said it's exiting the wholesale mortgage business.
The forecasts suggest that banks and securities aren't yet benefiting from the recovery in stock prices and signs that access to credit may be easing. Investors will get a clearer picture of the damage when Wall Street's third-quarter earnings reports start tomorrow with Lehman Brothers Holdings Inc.
``Each week we're uncovering more and more data and stories that are framing for people how large the overall scope of this credit-market problem is,'' said Michael Barron, who manages about $1 billion as chief executive officer of Knott Capital Management in Exton, Pennsylvania.
Earlier today, National City Corp., Ohio's largest bank, said it expects a $160 million loss at its mortgage business.
Merrill Lynch & Co. said last week that ``challenging'' conditions in fixed-income markets required ``fair value adjustments'' to certain investments and financing commitments, and any losses will be reflected in third-quarter earnings. Today, the New York-based firm said its First Franklin subprime- mortgage unit is cutting jobs.
