NEW YORK - The credit crisis that walloped Wall Street this year shows no signs of abating in early 2008, but investors can take comfort in the fact that the new year brings with it a battle plan.
If the last half of 2007 is any indication, the U.S. economy will be shaky going into the first quarter. Housing continues to slump while credit markets remain tight, and that has some people wondering exactly how bad things could get next year.
The biggest difference between the summer's market turmoil and now: Wall Street knows what it is dealing with. So analysts are more confident that major financial institutions battered by the subprime-mortgage crisis will see their way clear.
"What you're getting now is a rotation of the players with new chief executives, and their main priority is to not let this happen again and to fix things as soon as possible," said Chris Johnson, president of Johnson Research Group. "What you'll see over the next few quarters is more short-term pain, but at the same time, it is a damage-control situation."
Johnson and other analysts say they believe there is no way around further losses as banks and brokerages shore up balance sheets. Global banks have taken more than $105 billion worth of write-downs this year to rid their portfolios of risky mortgage-backed debt.
The Bear Stearns Cos. Inc. and other Wall Street banks have certainly taken their lumps this year, and nobody is sure how much more is ahead. But there are signs the investment banks are taking steps.
Morgan Stanley, Merrill Lynch & Co. Inc. and Citigroup Inc. have arranged for billions of dollars in foreign investments to pump up their capital. Analysts say they believe that shows confidence that financial institutions will work through the crisis.
Bear Stearns chief financial officer Sam Molinaro said the investment banks also were closely monitoring the impact of interest-rate cuts and bailout plans introduced by the government. The Federal Reserve's rate cuts should encourage borrowing in 2008, while homeowners might get relief from the Treasury Department's plan to freeze some adjustable-rate mortgage payments that would have reset at higher levels.
However, it can take years for the full effects to be felt.
Analysts want to see what banks have to say about further write-downs before sinking money into the market. They are also eagerly awaiting the start of fourth-quarter earnings season Jan. 8.