Merrill Lynch to Write Down $5.5 Billion

October 5, 2007 No Comments »

Merrill Lynch said today that it expects a loss of up to 50 cents a share when it releases third quarter earnings on October 24, thanks in part to the dysfunctional secondary market and the deteriorating housing market.

On average, analysts covering the stock had predicted the company would earn $1.24 per share in the third quarter.

Merrill Lynch warned that it would write down nearly $5.5 billion, with about $4.5 resulting from negative mark-to-market adjustments to its positions in collaterized debt obligations, subprime mortgages, and leveraged financed commitments.

An estimated $967 million related to all non-investment grade lending commitments, regardless of the timing of funding or closing, will also be written down.

“While market conditions were extremely difficult and the degree of sustained dislocation unprecedented, we are disappointed in our performance,” Merrill Lynch’s chairman and chief executive Stan O’Neal said in a statement.

However, O’Neal appeared to be bullish on the prospects of a turnaround, saying signs of a recovery where already visible, while Merrill expects third quarter revenue to rise 20% from year-ago levels in its other lines of business.

“While it is very early in the current quarter and despite continued challenges in structured finance, we are beginning to see signs of a return to more normal activity levels in a number of markets,” O’Neal said.

“Given our strong core operating performance and solid market, liquidity and capital positions, we are confident in our ability to deliver superior returns to shareholders over the long term.”

Though one analyst felt this was just the beginning of the problems facing major banks and mortgage lenders.

“This is a multi-year problem, and the market, which has become very enthusiastic about these stocks, doesn’t have a clue as to how deep the problems are,” said Richard Bove, an analyst with Punk Ziegal & Co.

“The write offs they are taking are the beginning of a process that will take at least a couple of years to work out. This is simply not a one-shot development.”

It’s unclear how much of the loss comes from Merrill’s investment in First Franklin Financial, the subprime mortgage unit it purchased late last year for $1.3 billion from National City.

Merrill Lynch was trading up $2.17, or 2.90% to $76.95 in midday trading, well below its 52-week high of $98.68.

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