Wall Street brokerages put on a united front last week when it came to the credit crisis, saying that the worst was in the past and that business is going to improve.
But outside their boardrooms, not everyone is convinced things have turned around.
Last week, chief financial officers from the big investment banks seemed to read from the same script.
Lehman Brothers' Chris O'Meara proclaimed "the worst of the credit correction" was behind Wall Street; Morgan Stanley's incoming chief financial officer Colm Kelleher said "the worst is over" and Bear Stearns' Sam Molinaro added "the worst is largely behind us."
But there is a growing agreement that a recession could strike -- even with a recent US Federal Reserve rate cut -- and that the investment houses are still vulnerable to credit market disruptions, despite their protestations to the contrary.
"If the worst is over, then why did the Fed lower rates 50 basis points instead of the 25 that the market was expecting?" asked Hugh Moore, a partner with Guerite Advisors. "We had a huge loss of confidence in the markets and I'm not sure you can give the all clear when there's still so much uncertainty."
Indeed, former Fed chairman Alan Greenspan said the chance of a recession will linger as home prices slide.
US President George W. Bush acknowledged on Thursday that the US is experiencing "some unsettling times."
The amount of adjustable rate mortgages up for reset is set to peak this fall, with an estimated US$50 billion worth poised to adjust to higher rates next month. The number of borrowers whose mortgage payments will jump next month and in November and December will be the second-highest ever for a quarter, a report by Credit Suisse Group said.
Meanwhile, investors continue to shy away from leveraged loan debt. During the third quarter, Goldman Sachs Group Inc, Bear Stearns Cos, Lehman Brothers Holdings Inc, and Morgan Stanley combined to mark down some US$4 billion in investments -- most from troubled loans.
Credit markets also continue to be unsettled.
Harman International Industries Inc said on Friday that Kohlberg Kravis Roberts & Co and GS Capital Partners walked away from their US$8.1 billion buyout deal.
It was the latest in a string of private equity deals gone sour as borrowing has dried up.
A person familiar with the deal said the private equity firms backed off the deal because of concerns about Harman's financial health. The person asked not to be named because he was not authorized to speak publicly about the deal.
But the deal's collapse shows private equity has become less bold in the current environment.
"I think we're going to have more negative headlines, if for no reason than the mortgage resets coming in the next few quarters," said Joe Balestrino, a portfolio manager at Federated Investors Inc that manages US$21 billion of fixed-income assets. "At a minimum, the investment banks are somewhat limited in their use of capital -- much of it tied into hung deals."
Investors felt much the same way. Shares of the US investment banks failed to get the bounce some had expected once they tried to spell out the extent of their exposure to leveraged loans and mortgage-related securities.
Morgan Stanley reported profit fell 17 percent; its shares were down about 3 percent last week. Lehman Brothers gained 6 percent last week after it reported quarterly profit fell a smaller-than-expected 3.2 percent. Bear Stearns retreated about 1.5 percent since it reported that profits had fallen 62 percent.
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