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Merrill Lynch said it would write down US$5.5 billion ($7.4 billion) for bad bets on sub-prime mortgages and leveraged loans, becoming the only major Wall Street brokerage to take a loss from turmoil in the credit markets.
Merrill said it would post a third-quarter loss of up to US50c a share after writing down US$4.5 billion in collateralised debt obligations (CDO) and sub-prime mortgage holdings. Merrill had been expected to earn US$1.43 a share in the third quarter, according to Reuters Estimates.
This loss would be the first for Merrill since the fourth quarter of 2001, according to Reuters Estimates data.
It is also taking writedowns, on a gross basis, of US$967 million related to all non-investment grade lending commitments, regardless of the timing of funding or closing, the company said.
Washington Mutual and Sovereign Bancorp issued warnings on Friday. Citigroup, UBS and Deutsche Bank have issued similar warnings.
Moody's and Fitch Ratings lowered Merrill's outlook to "negative" from "stable." Their current ratings are the fourth-highest investment grade.
"The core issue is whether or not it is going to be enough. Merrill had huge exposures to the mortgage sector, the CDO sector and the collateralised loan sector," said Sean Egan, managing director of independent credit ratings firm Egan-Jones.
But investors seemed satisfied with the Merrill announcement.
"Once the institution comes clean and gives you some transparency ... the market can start to look ahead," said Bill Hackney, a managing partner at Atlanta Capital Management.
Merrill chief executive Stan O'Neal said fourth-quarter outlook for revenue remained "difficult to predict," but he said he saw evidence of long-term growth trends in its global businesses.
"We can do a better job of managing this risk, as we have done with other classes," O'Neal said.
"It's still going to end up being the second most profitable year in Merrill Lynch's history," said Chuck Carnevale, chief investment officer at Great Companies. "The company is not dying or going out of business."
Merrill's announcement follows the ouster of two top executives from its fixed income business.
Analysts said that could portend further job cuts.
- Reuters
