Merrill Lynch posts record loss

January 17, 2008 8:16:03 AM PST
Merrill Lynch & Co. on Thursday recorded its biggest quarterly loss since being founded 94 years ago after the world's largest brokerage took almost $15 billion worth of write-downs from bad subprime mortgage bets. The fourth-quarter loss was just short of $10 billion as Merrill Lynch became the latest Wall Street bank bloodied by the ongoing credit crisis. Its massive write-offs came largely from the shrinking value of securities backed by mortgages, which have soured as borrowers are unable to repay them on time.

Merrill Lynch joins rival Wall Street investment houses Morgan Stanley and Bear Stearns Cos. in posting losses in the last three months of fiscal 2007. Citigroup Inc., the nation's largest bank, reported on Tuesday a quarterly loss of almost $10 billion, the largest in its 196-year history.

John Thain, the new chief executive at Merrill Lynch, said he believes this will be the bulk of the company's write-downs from its subprime mortgage exposure. But he would not speculate about what 2008 might hold in store in other areas.

The huge housing-driven shortfalls come as weak economic data have intensified fears of a recession, and have increased pressure on the government for an economic stimulus plan. There is also increasing evidence that mortgage delinquencies are spilling over into credit cards, home equity loans, and other areas.

"I don't think you should anticipate any further problems of this magnitude," Thain said on a conference call with reporters. "There would have to be something incredibly bad out there to have this happen again, and our whole goals is to get 2007 behind us." The New York-based brokerage marked down $11.5 billion from mortgage-backed securities, and an additional $3.1 billion in adjustments to hedge positions on them.

That caused Merrill Lynch to post a net loss after preferred dividends of $9.91 billion, or $12.01 per share, compared to a profit of $2.3 billion, or $2.41 per share, a year earlier.

Analysts - who have had a hard time ascertaining just how steep losses would be for Wall Street banks - had been forecasting a $4.93 per share loss, according to Thomson Financial.

Merrill Lynch shares tumbled $3.50, or 6.3 percent, to $51.60 in morning trading. Share prices have fallen almost 50 percent since their high of $98.68 last year, wiping out some $40 billion in shareholder value along the way.

After joining Merrill Lynch last month, Thain pledged to clear the brokerage's books and shore up its capital base to better position it amid the credit market turmoil. He replaced Stan O'Neal, who was ousted after the former CEO's strategy on subprime mortgages backfired as homeowners defaulted on their loans at an alarming rate.

Thain said some layoffs are planned this year, though they "are not going to be significant" and will be a "small number" of the company's 64,200 employees. He also plans to beef up the company's risk management processes.

While calling the fourth-quarter results "unacceptable," he said Merrill Lynch has "substantially strengthened the firm's liquidity and balance sheet" over the past few weeks.

Merrill Lynch secured almost $13 billion worth of fresh capital, mostly from foreign wealth funds in Singapore, Korea, and Kuwait. It also addressed the balance-sheet woes by selling a commercial-finance unit.

The extra capital was needed after steep losses in the second half of 2007 led to its first annual loss since 1989. The full-year loss of $8.05 billion, or $9.69 cents per share, compared to a profit of $7.31 billion, or $7.59 per share, in 2006.

Merrill noted its fixed income, currencies and commodities businesses had significantly reduced client flows and decreased trading opportunities in the fourth quarter. The company s also significantly reduced its exposure to collateralized debt obligations, or CDOs, that have caused the biggest amount of problems for Wall Street.

CDO exposure was $4.8 billion at the end of 2007, down from $15.8 billion three months earlier. For the same periods, exposure to subprime-residential mortgages fell to $2.71 billion from $5.66 billion.

Investment banking revenue dropped 11 percent from a strong year-ago period. Equity trading revenue jumped 23 percent amid "substantial" growth in client volume. The past few quarters have been good for stock trading due to big swings in major market indexes, an ideal condition for many trading shops.

But, because of the write-offs, Merrill Lynch posted negative revenue of $8.19 billion, down from revenue of $8.39 billion a year earlier.