The Wall Street Journal-20080215-breakingviews-com - Financial Insight- Earnings- Pick a Number- On Wall Street- Estimating Profits Is Challenging Game Based on Opaque Statistics

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breakingviews.com / Financial Insight: Earnings? Pick a Number; On Wall Street, Estimating Profits Is Challenging Game Based on Opaque Statistics

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Estimates of what Wall Street might earn this year started out too rosy. With the credit markets now taking another turn for the worse, they were looking downright silly. So analysts are rightly, if belatedly, slashing their earnings forecasts. Even so, divining just how much coin investment banks will mint is still a shot in the dark.

Estimating write-downs is more art than science. Take Goldman Sachs Group, whose chief, Lloyd Blankfein, steered it to a record profit in 2007. Only a couple of its investments, in Chinese bank ICBC and Japan's Sumitomo Mitsui, are easy to calculate; their declining share prices would currently cut Goldman's quarterly revenue by about $420 million. (Goldman's fourth-quarter revenue was $10.7 billion.)

There is no such transparency elsewhere. The value of the $43 billion of leveraged loans Goldman held at the end of its fiscal year could have fallen by anything from $1 billion to $3 billion depending on which index one uses as a measuring stick.

Then there are commercial mortgages. Indexes measuring these have fallen almost a quarter since the start of December, when Goldman's fiscal first quarter began. Applying these declines would suggest a $4.3 billion hit. That would be extreme. Lehman Brothers Holdings reckons its chief rival will take write-downs of about $550 million on its commercial-real-estate holdings.

What about Goldman's $12 billion of private-equity investments? Under accounting rules, the investment bank must indicate what it thinks might be the fair value of this portfolio, which includes stakes in pipeline operator Kinder Morgan and Texas utility TXU. Lehman estimates the losses here at $239 million; Deutsche Bank forecasts $900 million. The latter mirrors the decline in equity markets. All these bits and pieces could lop $2.2 billion to $8.6 billion off Goldman's quarterly top line.

And this is all before taking into account the investment banking and trading businesses that made Goldman the capital it is putting to work in private equity and principal investments. Dealogic estimates Goldman's fees for mergers and sales of new securities have halved since last quarter. But estimates are just that, estimates.

Lastly, Goldman's trading operations, responsible for 60% of 2007 revenue, are famously opaque. About $1.3 billion of revenue last quarter came from what Goldman said were one-time events. Yet recent volatility in the markets has no doubt been good for trading equities, currencies, commodities and rates.

What does that mean for investors? Don't be surprised if Goldman's trading desks pull in $4 billion -- or maybe $8 billion or some other number. That is hardly useful. But Wall Street profitability has always been a guessing game.

Comcast Gunfight Avoided

It wouldn't make for good television, but Comcast has smartly headed off a gunfight. Activist investors took aim at the cable-TV giant's profligacy with cash and its corporate governance. The track record gave enough ammunition to fuel a nasty showdown come proxy season. Its boss, Brian Roberts, deserves credit for holstering his sidearm.

The most relevant criticism targeted Comcast's failure to deliver adequate returns on many of its assets. By agreeing to pay annual dividends of $750 million, a third of annual free cash flow, and to buy back $6.9 billion of stock, Comcast dispelled worries it would squander capital.

Comcast also rescinded a governance provision under which its chairman would have been paid millions of dollars for five years after his death. And it made its executive bonus program more shareholder friendly.

As long as the Roberts family shows a willingness to listen, shareholders can take some comfort.

-- Antony Currie and Lauren Silva

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This column is by breakingviews.com, an online financial commentary site.