Wall Street Banks Taking a Bruising

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Global markets have turned so ugly that Wall Street's mightiest firm, Goldman Sachs Group Inc., is at risk of posting its first quarterly loss since the financial crisis.

The culprit? Growing uncertainty among investors and cash-rich companies, driven by a slowing economy and fears that Western nations will fail to defuse debt problems that ballooned during the bailouts of 2008 and 2009.

Those worries have fed a sharp decline in revenue from stock, bond and merger deals. A spell of wild action in stock, debt and commodity markets has delivered another blow in the form of falling values on securities held to facilitate client trades.

Goldman isn't the only big bank under pressure. But as it and other firms respond to their shriveling business prospects with moves such as jobs cuts and bonus reductions, they risk further undermining the economy.

With a week left in the third quarter, "we struggle to find any broker-dealer businesses reporting positively trending results," Barclays Capital analyst Roger Freeman wrote in a note to clients Thursday. He predicted that Goldman will lose 35 cents a share for the third quarter, reversing a year-ago profit of $2.98 a share and marking just its second quarterly loss in a dozen years as a public company. Mr. Freeman had been predicting a third-quarter profit at Goldman of $2.40 a share. Goldman declined to comment.

Jefferies Group Inc., a midsize investment bank, said Tuesday that revenue in its fixed income business plunged 79% from last year's third quarter. Shares in Goldman's chief rival on Wall Street, Morgan Stanley, have dropped 21% this week amid doubts about its profit outlook and exposure to the European financial crisis.

Third-quarter revenue expectations at six big U.S. banks—Bank of America Corp., J.P. Morgan Chase & Co., Citigroup Inc., Wells Fargo & Co., Goldman and Morgan—have fallen 7% since midyear, according to analysts surveyed by data provider FactSet Research Systems. That is the biggest drop since the fourth quarter of 2008.

The banks' pain has widespread implications on Wall Street and across the country. Weaker banks will likely lend less, pressuring an economy already flirting with recession. Bankers' bonus checks, which fund everything from second homes to private school educations, are expected to plummet, in some cases to zero.

Mike Mayo, a bearish bank analyst at Credit Agricole Securities, sees a bruising retrenchment ahead.

"The industry can't escape the need to reduce expenses," Mr. Mayo said in an interview.

Already, Bank of America has said it will lay off 30,000 workers. Goldman is planning to cut more than its usual percentage of low performers. Morgan Stanley is trimming brokers from its wealth-management joint venture with Citigroup.

There are fewer places for the laid-off employees to go, since many boutique firms are also scaling back. During the quarter, investment bank Gleacher & Co. said it would close its equities division, shedding 20% of its workforce, or 94 jobs.

Some of the banks' difficulties are tied to the crisis in Europe. Morgan Stanley shares fell 5.5% on Thursday, pressured by a report on investing Web site Zero Hedge that highlighted Morgan Stanley's exposure to French banks. The report cited data in Morgan Stanley's 2010 annual report showing $39 billion of so-called cross-border outstandings at Dec. 31.

Analysts and a person familiar with the firm said Morgan Stanley's net exposure to French banks was actually close to zero now. They added that the Dec. 31 figure can be misleading since it doesn't take into account hedges or cash a bank holds on behalf of clients.

But a bigger problem is that Wall Street banks are finding it more difficult to profit from trading even plain-vanilla debt like corporate bonds and mortgage securities, since bond markets have experienced unusually violent price swings in recent weeks on relatively low trading volumes. In the past, price volatility created more opportunities for Wall Street traders to make money. But now, banks have less appetite to take riskand step into trades, especially when bond prices are being driven up and down by external events and news, say traders.

Cost-cutting on Wall Street is always a double-edged sword. It helps profits in the short term, but firms risk missing future revenues if the markets bounce back—as was the case at Morgan Stanley in 2009.

While regulators have pushed banks to put themselves on more solid financial footing, some of the rumors floating around the market echo the panicked days of late 2008. Mr. Freeman on Thursday found himself chasing a rumor on Twitter about a bond fund blowing up and one or more banks providing a financial backstop. Mr. Freeman called the company involved and found out it wasn't true.

Despite that episode, he says there is not as much panic as there was then. But few investors are excited about financial stocks, either.

"There's more apathy about these businesses," said Mr. Freeman. He believes there is value in Goldman and Morgan Stanley, but they both need an end to market fears about Europe. And to fix that situation, "it might take a significant market rout to force the issue."

—Serena Ng contributed to this article