Goldman Sachs took the surgeon's knife to its Wall Street rivals today, dramatically raising its credit crunch loss estimates for Citigroup, Merrill Lynch and JP Morgan. It forecast the trio will take a combined $33.6 billion (£17 billion) hit in the fourth quarter - compared with earlier estimates of $18.7 billion.

Goldman said it now forecast Citigroup writedowns would rise from $11 billion to $18.7 billion, Merrill from $6 billion to $11.5 billion and JP Morgan from $1.7 billion to $3.4 billion.

Most of the write-downs are linked to the banks' exposure to collateralised debt obligations (CDOs) which were special debt instruments that were heavily invested in risky assets such as US sub-prime mortgages.

Exposure to CDOs has already led several Wall Street and European banks to record write-downs of more than $70 billion and forecast losses for the three months to December.

The losses have led to the ousting of two Wall Street chief executives, Citigroup's Charles Prince and Merrill's Stanley O'Neal. But Goldman says things are going to get worse before they get better.

Goldman analyst William Tanona said in a research note to clients: "Although we have seen many firms take the appropriate actions in recent weeks as they relate to write-downs and capital raises, we still believe it will be a couple of quarters before the current credit crisis is fully digested by the markets."

As a result of the chunkier write-downs, Goldman said it now believed Citigroup would post a fourth quarter loss of $1.33 a share, up from its earlier estimate of 52 cents. It said Merrill's loss would spiral to $7 a share from $1.50 while it cut its estimate for JP Morgan's fourth quarter profit to 65 cents a share from $1.04.

It also said that Citigroup would need additional capital of between $5 billion and $10 billion and could be forced to cut its dividend by 40 per cent in 2008 to preserve cash.

Shares of the three banks fell in early trading in New York. Citigroup's stock was off 1.64 per cent at $29.95, down 45 per cent so far this year; Merrill lost 1.28 per cent at $53.84, off 41 per cent this year and JP Morgan dropped to $44.61, down 0.73 per cent on the day and 7 per cent on the year.

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