Merrill Lynch Takes Huge Mortgage Hit

October 24, 2007 No Comments »

Merrill Lynch& Co. Inc. announced third-quarter earnings Wednesday morning, revealing a huge mortgage-related hit and its first quarterly loss since 2001.

For the quarter, Merrill posted a net loss of $2.3 billion, or $2.85 a share compared to a profit of $3 billion in the year-ago period, while net revenue plummeted 94 percent to $577 million from $9.8 billion.

Analysts polled by Thomson Financial had expected the firm to post a loss of 45 cents per share on $3.25 billion in revenue.

“I’m not going to talk around the fact that there was some mistakes that were made,” Chief Executive Stan 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 took a whopping $7.9 billion writedown for bad loan bets in the third quarter, much higher than their $5 billion estimate earlier this month.

“The bottom line is we got it wrong by being overexposed to subprime,” O’Neal told analysts during a conference call.

The brokerage has been working to scale back its subprime exposure, reducing it by 35 percent to $5.7 billion in the third quarter, while scaling back CDO exposure by 53 percent to $15.2 billion.

But many analysts are left to wonder if the writedowns are just the beginning of the problem for the giant brokerage.

The news forced credit rating agency Standard & Poor’s to lower its rating on Merrill by one notch to “A+/A-1”.

“The absolute size of the loss related to CDOs and subprime mortgages, and management’s miscues regarding the valuation of its positions, further heighten our concerns regarding the company’s risk management practices and business strategy,” S&P analyst Scott Sprinzen said in a note.

The biggest losses came in its fixed-income business, with negative revenue of $5.6 billion because of its CDO and subprime mortgage exposure.

Merrill Lynch bought subprime lender First Franklin Financial last December for $1.3 billion, just months before the mortgage crisis came to light.

It’s unclear how much was lost with that investment, and what the future holds for the wholesale mortgage lender in the current lending environment.

Shares of Merrill Lynch were trading down $3.50, or 4.21% to $63.62 in midday trading on Wall Street, now roughly a buck below its 52-week low.

Leave A Response