Analysts see lower Q2 earnings at investment banks

By Neha Singh and Tenzin Pema

BANGALORE (Reuters) - Wall Street analysts have forecast a huge drop in second-quarter earnings for Goldman Sachs Group Inc (GS.N) and Morgan Stanley (MS.N), while Lehman Brothers Holdings Inc LEH.N is expected to post its first-ever quarterly loss, mainly on hedging losses.

Analysts expect the three Wall Street investment banks reporting results this week to record losses mainly from ineffective hedging, amid an overall tough operating environment. Lehman is projected to take the worst hit.

"Business conditions appear to be among the worst in several years, bulk asset sales have provided price transparency that should trigger more asset write-downs, and hedging was noticeably less effective," David Trone, an analyst at Fox-Pitt Kelton, said in note last week.

Goldman's earnings are expected to be $3.03 to $3.70 per share, while Morgan Stanley's earnings are seen at 75 cents to $1.08 a share, according to analysts' data compiled by Thomson Reuters.

Last week, Lehman said it expects a second-quarter loss of $2.8 billion, or $5.14 a share, mainly due to poor trading results and hedging losses. Lehman's second-quarter loss estimate was more than 10 times the analysts' average expectation.

HEDGING LOSSES

"In the current quarter, it appears that the brokers have not judged risk appropriately once again," Ladenburg, Thalmann & Co analyst Richard Bove said.

"The hedge is not working," wrote Bove, who had nearly a year ago recommended that investors sell financial stocks as credit market problems began.