Merrill writes down $7.9 bln of subprime bets
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By Tim McLaughlinNEW YORK (Reuters) - Merrill Lynch & Co Inc on Wednesday reported its first loss in six years after writing down $7.9 billion of bad bets on risky subprime mortgages and related securities."The bottom line is we got it wrong by being overexposed to subprime," Merrill Lynch Chairman and Chief Executive Stan O'Neal said on a conference call. "And we suffered as a result of an unprecedented liquidity squeeze and deterioration in that market. No one, no one is more disappointed than I am in that result."Merrill Lynch shares slid 5.44 percent to a two-year low, hurt further by Standard & Poor's ratings cut on the investment bank's "startling announcement." The stock, trading at $63.47 on the New York Stock Exchange, is down 32 percent this year.Merrill Lynch's third-quarter net loss was $2.3 billion, or $2.85 a share, from continuing operations, compared with a profit of $3 billion, or $3.14 a share, a year earlier."There's not much to like about this performance," Credit Suisse analyst Susan Roth Katzke said in a research note.More write-downs could be coming if the world's largest brokerage further cuts the value of its remaining $20.9 billion exposure to collateralized loan obligations and subprime mortgages. O'Neal said the company is still working to resolve the impact of loans to people with weak credit."I'm not going to talk around the fact that there was some mistakes that were made," O'Neal said. "I am accountable for the mistakes as I am accountable for the performance of the firm overall and my job, our job, the leadership team's job is to address where we went wrong."Merrill was the only big Wall Street firm to post a third-quarter loss. And its write-downs -- before hedges -- were bigger than the combined $3.6 billion in write-downs and charges recorded by rivals Goldman Sachs Group Inc , Bear Stearns Cos Inc , Morgan Stanley and Lehman Brothers Holdings Inc ."This is a bloodbath for certain. It speaks very poorly to Merrill's risk management practices," said Bill Fitzpatrick, an analyst at JohnsonFamily Funds in Racine, Wisconsin, which invests $1.8 billion but does not own Merrill shares."Clearly, heads are going to roll, and I wouldn't be surprised to see meaningful near-term layoffs," he said.The $7.9 billion of write-downs was more than the $5.5 billion Merrill forecast earlier this month. After re-examining its positions on collateralized debt obligations, it used more conservative assumptions for valuing those assets.Merrill said the net write-down figure does not include a $967 million write-down, before fees, of commitments that include loans for takeovers.O'Neal cited continued uncertainty in the market for risky subprime mortgages as defaults on those loans continue to rise and sap the strength of the U.S. economy.Camilla Petersen, an analyst who covers financial stocks for Atlantic Equities in London, called the losses in Merrill's fixed-income portfolio "pretty spectacular.""I think it shows two things: sloppy risk management and very aggressive risk taking," Petersen said. "They have tried to diversify away from their core strengths, which are equities, investment banking and wealth management, all of which did very well during the quarter."She said Merrill has a track record of going into businesses in a big way and then having to retrench."Merrill did that with energy -- entered the business and exited and now has gone back in," she said, citing one example.(Additional reporting by Jonathan Stempel and Olesya Dmitracova)
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