Aug. 19 (Bloomberg) -- Goldman Sachs Group Inc. analysts led by William Tanona slashed earnings estimates for banks and brokerage firms and recommended that investors buy shares in Morgan Stanley while selling Citigroup Inc.

Morgan Stanley ``is one of the best-positioned brokers in our universe from a business mix perspective when the environment turns while Citi remains heavily exposed to mortgages and consumer credit,'' Tanona wrote in a note to investors today.

Goldman, the largest U.S. securities firm by market value, joined rivals in cutting third-quarter estimates for banks and brokerages as mortgage-asset values continue to drop and demand for the firms' services stagnates. Share prices of the five New York-based companies cited in Tanona's note today have dropped this year, with declines ranging from 18 percent for JPMorgan Chase & Co. to 80 percent for Lehman Brothers Holdings Inc.

``A major recovery is still a few quarters away, as we anticipate additional asset sales and writedowns in coming quarters throughout the financial services sector,'' Tanona wrote. ``We assume no or negative earnings for the majority of firms in our universe this quarter,'' he added.

For the fiscal third quarter that ends this month, Tanona cut his estimate for Morgan Stanley's earnings per share to 85 cents from a prior estimate of $1.10, as results are ``hampered by declining global equity markets, further deterioration in mortgage assets, and slower levels of corporate and institutional activity.'' Morgan Stanley stock is down 28 percent this year.

Commodities Franchises

Lehman Brothers, the fourth-biggest U.S. securities firm after Goldman, Morgan Stanley and Merrill Lynch & Co., will probably post a loss of $2.75 per share instead of the earlier estimate of a 68-cent profit, Tanona's note said. He expects Lehman to take a writedown of $2.5 billion to $3.5 billion on the sale of about $15 billion in mortgage assets.

Merrill, whose quarter ends in September, will probably lose $4.75 per share instead of the $4.40 loss Tanona predicted earlier, according to the note. The wider loss reflects ``further deterioration'' in the value of residential mortgages, commercial mortgages and leveraged loans, the note said. Merrill shares have dropped 56 percent this year.

Citigroup, whose stock is down 42 percent in 2008, is now expected to break even for the third quarter instead of generating 17 cents a share and JPMorgan will probably earn 40 cents a share instead of 64 cents, the note said.

While Morgan Stanley and JPMorgan are likely to generate revenue from fixed-income, currencies and commodities this quarter, Lehman, Merrill and Citigroup may wind up with negative revenue in that area because of writedowns, Tanona said.

``We expect firms with strong commodities franchises to post better core revenue,'' Tanona wrote. ``Morgan Stanley in particular should show the largest benefit.''

To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net.

Last Updated: August 19, 2008 18:15 EDT