Morgan Stanley: Credit Crunch is Far From Over

The financial woes haunting the nation’s financial markets are far from over, predict Morgan Stanley analysts. On Monday, the company advised clients to “sell the rally” in financial stocks, as it slashed forecasts for big bank earnings and warned that the credit crunch is just beginning.

In aggregate, Morgan Stanley reduced its estimates for 2008 large bank earnings by $17 billion, or 26 percent, and reduced 2009 forecasts by $13 billion.

The investment bank forecast higher loan losses and expenses, saying profits could fall even further if the Federal Reserve stops lowering interest rates. Analysts led by Betsy Graseck wrote in a report that “more capital hikes and dividend cuts (are) coming as our credit deteriorates and forward earnings decline.

“We think we are only in the third inning of the credit cycle and expect this credit cycle will be worse than (the slump in) 1990-91.”

Many on Wall Street have believed that the markets are closer to the end of the current mortgage and corporate credit crisis than to the beginning. The latest forecast by New York-based Morgan Stanley, the second-biggest securities firm behind Goldman in terms of market value, means the light at the end of the credit-crisis tunnel may not be as bright as we first thought. The turmoil of the markets is here to stay for now.

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