Merrill Lynch posts losses...OUCH!

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Oct 24, 2007 6:16 pm


Oct. 24 (Bloomberg) -- Merrill Lynch & Co. reported the biggest quarterly loss in its 93-year history after taking $8.4 billion of writedowns, almost double the firm's forecast three weeks ago.

The writedowns on subprime mortgages, asset-backed bonds and leveraged loans led to a third-quarter loss of $2.24 billion, or $2.82 a share, six times more than Merrill estimated on Oct. 5. Chief Executive Officer Stanley O'Neal said today that the New York-based firm may sell assets to shore up its balance sheet.

Merrill's stock fell the most in five years, its credit rating was cut and the perceived risk of default on the company's bonds rose after O'Neal said the firm misjudged the severity of the decline in debt markets since July. Investors who lauded the 56-year-old CEO for chasing higher returns as the biggest underwriter of securities backed by subprime loans now question his management. O'Neal said the firm increased the writedown after a more ``conservative'' analysis of its holdings.

``We're very disappointed,'' said Rose Grant, who helps manage about $2 billion at Eastern Investment Advisors in Boston, including Merrill shares. ``I don't think Stan O'Neal will step down, but you do have to look at top management and wonder why they didn't know the extent of this loss.''


Standard & Poor's, Fitch Ratings and Moody's Investors Service lowered their assessments of Merrill's credit. S&P cut its rating on Merrill's senior unsecured debt to A+ from AA-, describing the quarter's loss as ``startling'' and citing ``management's miscues'' that raised concern about the firm's risk controls and business strategy.

Financial stocks sank, led by Merrill, which dropped 5.8 percent to $63.22 in New York Stock Exchange trading. Lehman Brothers Holdings Inc., the largest U.S. underwriter of mortgage bonds, declined 1.5 percent to $57.42. Bear Stearns Cos., the second-biggest, fell 2.3 percent to $113.54.

Merrill's third-quarter revenue fell 94 percent to $577 million, as losses in the fixed-income division overshadowed gains from underwriting stocks and providing merger advice. At Merrill's retail brokerage, the nation's biggest with a network of 16,610 financial advisers who cater to individual investors, revenue climbed 23 percent to $3.27 billion.

O'Neal, on a conference call with analysts, said he was ``continuing to resize'' the firm's balance sheet. He also said he's weighing potential divestitures of ``non-core'' businesses.

BlackRock Stake

The firm owns stakes in companies including BlackRock Inc., the largest publicly traded U.S. fund manager. Merrill is also a passive minority investor in Bloomberg LP, the parent of Bloomberg News.

The BlackRock stake isn't for sale, O'Neal said on the call. ``We want to own this asset for the foreseeable future,'' he said. He declined to comment on other investments.

Merrill's compensation costs fell by 49 percent from a year earlier to $1.99 billion, indicating that the quarter's losses may reduce year-end bonuses for some of Merrill's 64,200 employees. The firm said today that it ``remains focused on paying its best performing employees competitively.''

Merrill said its holdings of so-called collateralized debt obligations, or CDOs, along with other securities and loans linked to subprime mortgages, lost $7.9 billion of their value in the quarter. CDOs are bonds created from pools of debt securities and loans.

The size of the writedown increased from $5 billion after Merrill conducted ``additional analysis'' since the firm's Oct. 5 announcement, O'Neal said on the conference call.

`Remaining Impact'

``We expect market conditions for subprime mortgage-related assets to continue to be uncertain and we are working to resolve the remaining impact from our positions,'' he said in the company statement.

Merrill also wrote down the value of leveraged buyout loans the firm couldn't sell to investors by $463 million, after underwriting fees.

Taken together, the charges are the biggest ever by a Wall Street firm, said Charles Geisst, a finance professor at Manhattan College in Riverdale, New York.

``It's safe to say this is the largest writedown'' by a U.S. securities firm, said Geisst, the author of ``100 Years of Wall Street.'' ``The only other time we had such big losses was the third-world debt crisis in the 1980s. Even then, the losses didn't match this one.''

Merrill's writedown exceeded Citigroup Inc.'s $6.5 billion and increased to more than $30 billion the total third-quarter cost for bad loans and trading losses reported by the world's biggest securities firms and banks.

Worst Performer

Slumping credit markets have led to the dismissal of industry executives including UBS AG Chief Executive Officer Peter Wuffli and Bear Stearns Co-President Warren Spector, and resulted in Lehman Brothers Holdings Inc., E*Trade Financial Corp., Citigroup and Merrill losing more than 20 percent of their stock market value.

Merrill said it reduced its inventory of CDOs comprised of asset-backed securities by 53 percent during the quarter to $15.2 billion. The firm also whittled down the size of its LBO loan commitments to $31 billion, 42 percent less than at the end of the second quarter. Short-term borrowings climbed 80 percent from the second quarter and shareholders' equity declined 9.6 percent.

The company's shares dropped as low as $61.40 today in New York trading, the biggest decline since Sept. 17, 2001, according to Bloomberg data.

The stock is the worst performer among the five biggest U.S. securities firms this year, followed by Bear Stearns, where two hedge funds lost $1.6 billion of clients' money. Merrill has dropped about 32 percent, and Bear Stearns has fallen 30 percent.

Investors Flee

Goldman Sachs Group Inc., the biggest securities firm by market value, has gained 13 percent. No. 2 Morgan Stanley is down 7 percent. All the companies are based in New York.

Credit-default swaps tied to Merrill Lynch bonds rose 5 basis points to 95 basis points, according to Phoenix Partners Group in New York. That's more than double where they were two weeks ago and almost six times the spread at the beginning of the year. The cost of the swaps, which are contracts protecting payments on bonds, rises as the perception of credit quality worsens.

Merrill, the third-biggest securities firm, is the only one of Wall Street's five largest to report a loss from the credit contraction. Investor flight from subprime mortgage bonds and related debt left the company with inventories of loans and securities that had to be written down to depressed market prices.

`Serious Embarrassment'

``If you can't guide toward a reasonable expectation over two weeks, clearly you've got bigger problems,'' said William Fitzpatrick, a financial-services analyst at Johnson Asset Management in Racine, Wisconsin, which oversees $1.7 billion and does not own Merrill shares.

Goldman reported a 79 percent increase in profit for the three months ended Aug. 31 after betting on a drop in prices of securities tied to home loans. Morgan Stanley said profit from operations fell 7 percent in the quarter.

Earlier this month, Merrill fired Osman Semerci, the head of its fixed-income trading division, as well as Dale Lattanzio, one of Semerci's top U.S. deputies. Merrill also severed ties with Dow Kim, its former co-head of trading and investment-banking, who oversaw fixed-income trading until May, when he left to start his own hedge fund.

``This is a serious embarrassment for O'Neal,'' said James Ellman, president of San Francisco-based Seacliff Capital in San Francisco, which oversees more than $200 million.


Merrill said in an Oct. 5 statement that it also had to write off $100 million related to First Franklin Financial Corp., a home-lending company that it bought for $1.3 billion on Dec. 30.

Investors' refusal to finance mortgages with a high risk of default has made subprime lending unprofitable, forcing more than 110 companies to close, file for bankruptcy or put themselves up for sale since the beginning of 2006. Current and former clients of San Jose, California-based First Franklin say the unit is now barely taking loan applications.

``We've got more skeletons to find out about, because the credit cycle has yet to play out,'' said Jon Fisher, who helps oversee $22 billion at Fifth Third Asset Management and doesn't own Merrill shares. ``This isn't over in just a year.''

To contact the reporter on this story: Bradley Keoun in New York at [email protected] .

Last Updated: October 24, 2007 17:34 EDT
Oct 24, 2007 6:49 pm

It appears that the overreaction (ie layoffs at Wachovia and Bank of America to name a few) has started. I wonder what these overpaid executives will reward themselves with in the form of bonuses this year.  You have to love corporate america!

Oct 24, 2007 6:56 pm

Oh I am sure there will be more to follow before 4th quarter is up.

Oct 24, 2007 7:19 pm

Well, you know the five phases of any project:

1) Enthusiasm

2) Disillusionment

3) Failure

4) Search for someone to be the guilty party

5) Praise and honors for the non-participants

Oct 24, 2007 7:22 pm

I highly doubt Merrill is the only one with this kind of issue at the moment.

Oct 24, 2007 7:26 pm

Something about this I don’t understand.

Everyone, and I do mean everyone, knows that there’s trouble in Paradise. Why then don’t the big financials come clean in one fell swoop?

The only answer that I can think of is that they themselves don’t even know the extent of the carnage.

Oct 24, 2007 9:18 pm

I hear that.  If they’d said $10 billion to begin with and then came back with a reduced estimate, I think investors would have been kinder to the stock and more understanding of management’s mistakes.  This may sound callous, and I have nothing against the man, but do you think Stan would be fired if he were of a more prevalent color on Wall Street?

Oct 24, 2007 10:24 pm

Here you go...more good news! lol

      Federal Reserve pumps $25.5 billion in liquidity into markets this week
The Associated PressPublished: October 24, 2007

NEW YORK: The U.S. Federal Reserve has pumped $25.5 billion (€17.9 billion) in liquidity into the financial system so far this week, raising concerns of continued troubles in short-term funding markets.

The central bank released $8.5 billion (€5.9 billion) in cash on Tuesday and $6.5 billion (€4.5 billion) on Wednesday. The intervention came after the Fed pumped out $10.5 billion (€7.4 billion) on Monday.

The Fed's move raised the possibility of more troubles in short-term funding markets. However, the central bank's overnight rate has remained close to its target of 4.75 percent, suggesting that borrowing and lending in the federal funds market are properly functioning.

Veteran money-market watcher Lou Crandall of Wrightson ICAP downplayed the Fed's operations this week, saying "there is no sign this is a response to anything" other than technical pressures in the Fed funds market.

The Federal Reserve regularly intervenes in financial markets to achieve the monetary policy goals of the central bank's Federal Open Market Committee. The interventions influence activity in the federal funds market, where banks borrow and lend short-term funds.

Today in Business

Merrill Lynch reports $7.9 billion write-down

Carmakers get a break from EU lawmakers on emissions

BMW freezes a hydrogen car to make a point about global warming

Wednesday also marked the end of the two-week maintenance period for reserves, which can increase volatility.

Also Wednesday, markets saw safe harbor assets catch fire as investors looked for a secure place to land. Treasury bills garnered a solid bid, with the bond yield equivalent on the three-month bill plunging 0.14 percent in Wednesday morning trading before rising to 3.87 percent, down 0.12 percent.


Michael S. Derby is a correspondent for Dow Jones Newswires.
Oct 25, 2007 9:49 pm

Merrill is getting “Lynched” for a mistake (justifiable) but to question the franchise is non-sense. Merrill is a TOP PERFORMER in virtually everything they do, so they do it big or go home. Global Wealth Management performed spectacularly well, $26 billion new new assets! $1.8 Trillion AUM now. The fixed income screwed up big, so they will pay the price. Equities and IB also did great. And while a $2 bi loss is huge for most, it’s about one quarter’s worth of profits, so let’s put in perspective. 

Oct 26, 2007 12:25 pm

Dear Merrill Brokers,

Welcome to Wachovia Securities. Stan said you'd be happier here. Now start calling those maturing cd clients!
Oct 26, 2007 12:34 pm


Oct 26, 2007 2:54 pm

When you are top dog in the WM business like merrill always has been and always will be, you are going to get some people nipping at the bud for some bad news to come out..IE people who couldnt get an interview and are at UBS to give an example.

  Funny story..have a friend at XYZ firm (ML competitor) said he has gotten so many accounts because 10 or so people have left his office this year. Good for him. We havent had one person leave our ML office of 50 brokers this year, just 4 or 5 POAers who got canned because they werent getting it done. There is a reason people don't leave ML. Countdown till someone chimes in with an amazing story: "OMG I got 5 ACATS From ML this year".   Bottom line, ML GPC is and has always brought in the money for the company and given us our name, and now the g0d damn IB idiots are throwing it all out the window and giving us a bad name. Bye bye oneal. Dont let the door hit you on the way out.
Oct 26, 2007 6:21 pm

[quote=sbbroker]Dear Merrill Brokers,

Welcome to Wachovia Securities. Stan said you'd be happier here. Now start calling those maturing cd clients![/quote]   Believe me we don't want them! ROFLMAO!!
Oct 26, 2007 9:13 pm


When you are top dog in the WM business like merrill always has been and always will be, you are going to get some people nipping at the bud for some bad news to come out..IE people who couldnt get an interview and are at UBS to give an example.

 [/quote] I'd be careful about saying things like 'always will be". Time will tell.
Oct 26, 2007 9:34 pm

You are right with stan oneal around you never know

Oct 26, 2007 10:14 pm

I doubt he will last much longer…   Merrill’s Chief Is Said to Consider a Bid to Merge   By JENNY ANDERSON and LANDON THOMAS, Jr. Published: October 26, 2007   Facing billions of dollars in losses from the subprime mortgage crisis, Merrill Lynch chairman and chief executive, E. Stanley O’Neal, floated the idea of a merger with a large bank, a foray that angered Merrill’s board and could cost him his job, according to people close to the beleaguered Wall Street firm.  

Mr. O’Neal broached the possibility of a merger with Wachovia, the bank based in Charlotte, N.C., without first getting the approval of Merrill’s board, a major breach of corporate protocol at a time when directors were already concerned about the company’s performance, these people said.

Merrill’s board was so upset with Mr. O’Neal that it even discussed the names of potential candidates to replace him, according to people with knowledge of the board’s proceedings. Candidates who were discussed include Laurence D. Fink, chairman and chief executive of BlackRock, an investment firm partly owned by Merrill, and John A. Thain, chief executive of the New York Stock Exchange.

Jason Wright, a Merrill Lynch spokesman, said early today that there had been no contacts with any potential merger partners, but he declined to comment on whether there had been conversations with any banks. A Wachovia spokeswoman declined to comment. A Wachovia spokeswoman declined to comment.

The board’s reaction indicates that a merger with Wachovia is not likely for now. But the fact that the chief executive of Merrill, one of the most prominent investment banks, even made preliminary contact with Wachovia underscores how much the subprime mortgage crisis has rocked Merrill.

On Wednesday, Merrill reported a third-quarter loss of $2.3 billion and announced it would take a write-down of $7.9 billion on subprime mortgages and complex debt instruments, far more than the $5 billion it had predicted weeks earlier.

The sequence of events began late last week, according to people with knowledge of the discussions. Just days before a Merrill board meeting scheduled for Sunday, Mr. O’Neal called G. Kennedy Thompson, Wachovia’s chairman and chief executive, to float the idea of a merger, people briefed on the situation said. Mr. O’Neal inquired, “Would you be interested in having a conversation?”, according to a person briefed on their discussion. Mr. Thompson expressed interest in talking, while acknowledging the difficulty of the deal.

Mr. O’Neal, increasingly embattled with the bank’s growing loss, then directed Gregory J. Fleming, Merrill’s co-president, to follow up with Wachovia executives. Mr. Fleming has a close relationship with Mr. Thompson, and has represented him on many merger deals.

A merger could help Merrill weather the deepening crisis and make Wachovia a much more powerful financial player. Though less prominent, Wachovia has a higher stock market capitalization — about $86 billion, versus $52 billion for Merrill. Wachovia, which became the second-largest retail brokerage firm after acquiring A. G. Edwards, has been much less hurt by the recent market turmoil than Merrill, whose stock price has fallen to $60.90 a share from a 52-week high of more than $98.

Any merger between Merrill, with 15,000 retail brokers, and Wachovia, with 10,137 brokers, would likely face antitrust questions, and a deal would not likely be received well by Merrill’s brokers. In recent weeks, as the scope of the losses mounted, Mr. O’Neal has fired a number of executives, the latest round of firings he has made since taking the top job.

Merrill’s stock has fallen almost 10 percent in the past two days as Mr. O’Neal has come under intense criticism for what analysts called a complete risk management failure. With billions of dollars shaved off of its market capitalization and analysts convinced that an additional write-downs might be coming, Merrill is an attractive target.

Mr. Fink is widely considered to be the top candidate, should Mr. O’Neal depart. Merrill Lynch is a 49 percent shareholder in BlackRock, having merged its asset management business with Mr. Fink’s firm in 2006, a deal seen as one of Mr. O’Neal’s better strategic moves.

Eric Dash contributed reporting.

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Oct 26, 2007 10:45 pm

A merger between ML and Wachovia makes as much sense as a merger between Mercedez Benz and Hyundai.

Oct 26, 2007 11:58 pm

[quote=sbbroker]Dear Merrill Brokers,

Welcome to Wachovia Securities. Stan said you'd be happier here. Now start calling those maturing cd clients![/quote]   Can you believe that? Stan contacting Wachovia, of all people Why not JPM?), and without mentioning it to the board? Could he still have his job next week?
Oct 27, 2007 1:09 am

I actually ACAT as many accts from ML than anywhere else

Oct 27, 2007 10:26 am

Careful what you wish for. When all of the major houses mrege with each other or banks to form 2 or 3 mega-brokerages, the brokers will be working for $7/hour. So I’m not getting too elated over the possible demise of Merrill as an independent entity just yet.