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Merrill Lynch has jolting loss

The credit crisis takes a bigger toll than the broker had predicted.

Associated Press
Published October 25, 2007


NEW YORK - Merrill Lynch & Co. took a $7.9-billion writedown on Wednesday because of the summer's credit crisis, a bigger-than-expected amount that raised the specter of more trouble ahead from risky home loans.

The world's largest brokerage was caught off guard by its bad bets, leading to its first loss in six years. Merrill Lynch's quarterly performance was the worst by far of Wall Street firms.

The shortfall calls into question how one of the biggest names in finance could be so off the mark, just three weeks after telling Wall Street its losses would be significantly less.

"I'm not going to talk around the fact that there were some mistakes that were made," chairman and chief executive Stan O'Neal told analysts during a conference call. "The market environment has showed renewed signs of volatility and weakness, as shown by recent downgrades on thousands of mortgage securities by rating agencies."

Merrill Lynch's news helped send the markets on a wild ride Wednesday. The Dow Jones industrials fell in morning trading by as much as 200 points, but the blue chip index reversed direction later in the day, briefly bobbing into positive territory as rumors circulated that the Federal Reserve - scheduled to meet next week - might be lowering the discount rate before then.

The Dow was off just 0.98, or 0.01 percent, at 13,675.25.

Broader stock indicators fell, but were also off earlier lows. The Standard & Poor's 500 index fell 3.71, or 0.24 percent, to 1,515.88, while the technology-dominated Nasdaq composite index lost 24.50, or 0.88 percent, to 2,774.76.

O'Neal said Merrill continues to face uncertainty as global investors shy away from risky investments, especially in the once-booming fixed-income markets where mortgages are packaged together and sold as securities. The value of these investments has been difficult to determine - one reason Merrill Lynch said its third-quarter results were sharply worse than it initially expected.

For a number of analysts, the loss shined a harsh light on the company's risk management process.

"Results reflected what we see as poor risk management in U.S. fixed income and higher charges than announced only 2 1/2 weeks ago," Deutsche Bank analyst Michael Mayo said in a research note. "The lingering question in our minds is whether all of the write-downs have been taken."

Merrill, like many of its rivals, was battered as concerns about mortgage securities triggered a global aversion to risk. Weak credit markets also forced it to write down the value of leveraged buyout loans - about $463-million - as investors refused to finance them. Such loans were a Wall Street staple during the merger and acquisition boom.

But the biggest trouble spot for Merrill was its fixed-income business, which is typically one of the company's top earnings drivers. Revenue in the unit was actually negative, some $5.6-billion in total, because of its collateralized debt obligation, or CDO, and subprime mortgage exposure.

Shares in Merrill fell $3.90, or 5.8 percent, to close at $63.22.


Crippling quarter

Bellwether Wall Street brokerage Merrill Lynch & Co. reported a quarterly loss after paying preferred dividends of $2.31-billion, or $2.82 per share, compared with a profit of $3-billion, or $3.50 per share, a year earlier. Revenue, after factoring in some of its losses, fell 94 percent to $577-million, from $9.83-billion a year earlier.

[Last modified October 25, 2007, 00:35:15]

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