Profits flood in to Wall Street investment banks during 'phenonmenal' quarter

In this past week alone, Bank of New York Corp. said it would buy rival Mellon Financial Group Inc. for $16.5 billion, and LSI Logic Corp. snapped up rival Agere Systems Inc. for $4 billion.

"The quarter has been phenomenal," said Brad Hintz, a banking analyst with Sanford C. Bernstein & Co.

"There won't be a question if things are weakening, but instead it's a matter of how high they will go and by how far brokerages will beat analyst expectations."

Goldman Sachs, Morgan Stanley Inc., Merrill Lynch & Co., Lehman Brothers Holdings Inc. and Bear Stearns Cos. have earned a combined $21.3 billion in the first nine months of the year. This surpasses their previous full-year record of $20.4 billion in 2005.

The companies are expected to report a combined $128 billion of revenue this year, according to analysts surveyed by Thomson Financial. Bear Stearns and Lehman report Thursday, while Morgan Stanley is scheduled for the following week and Merrill Lynch in January.

Guy Moszkowski, an analyst with Merrill Lynch, last week readjusted his fourth-quarter projections higher for the group. At the heart of it, he said, is that equity underwriting has surged 61 per cent from the third quarter.

He also noted that initial public offering activity has risen 114 per cent from the third quarter. Proprietary trading - investing a brokerage's own money - also could see record levels during the quarter because of Wall Street's bull run.

"Trading fundamentals are generally strong," Moszkowski said. "Equity markets have rebounded solidly this quarter from the weakness we saw this summer."

But, can this continue? That answer might come as chief financial officers at the major brokerages lead analysts through their earnings reports, and outline how they feel 2007 will shape up.

A strong forecast looks likely - and that signals the good times for individual investors will also continue.

Richard X Bove, an analyst with Punk, Ziegel & Co. says investors use the investment banks as a gauge of the market itself. Their stock prices will go higher if it appears the economy will continue to roll along, or get slammed if a slowdown is forecast.

And it's not just investors that have a lot riding on what these companies forecast. The big year on Wall Street has already paid off for the executives that lead them.

Lehman Brothers, the fourth-largest U.S. securities firm, said during the week it will pay chairman and CEO Richard Fuld an extra $186 million during the next 10 years. There has been talk that 50 executives at Goldman Sachs might receive $25 million each as bonuses, though the company would not comment.

"The fact there's a rumour out there about this shows you what kind of a year it has been," Hintz said.

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