Merrill Lynch Expected to Write Down $15 Billion

January 11, 2008
Merrill Lynch Expected to Write Down $15 Billion

The New York Times reported today that Merrill Lynch is expected to announce an enormous $15 billion writedown when it reports earnings next week, according to sources close to the company.

The losses, stemming from bad mortgage bets, are almost double its original estimate, forcing the company to look for additional capital from an outside investor.

The struggling investment bank is reportedly in talks with investors in the United States, Asia, and the Middle East, and is looking to raise $4 billion, in addition to the $5.6 billion stake it sold to Singapore-based Temasek Holdings last month.

In recent months, the Government of Singapore Investment Corporation invested $9.7 billion in UBS, Citigroup sold a $7.5 billion stake to the Abu Dhabi Investment Authority, and the China Investment Corporation invested $5 billion into Morgan Stanley.

Brad Hintz, a securities analyst at Sanford C. Bernstein & Company, believes Merrill will write down its $27 billion of CDO and subprime-related exposures by $10 billion and report a loss of $5.10 a share for the fourth quarter.

Additionally, Merrill’s estimated $10 billion fourth-quarter writedown would shrink shareholders’ equity to 12 percent less than rival Goldman Sachs.

Significant, because just two years ago the firm’s assets minus liabilities were on par with Goldman’s, a bank which seems to have avoided the brunt of the mortgage crisis.

And Merrill, whose market value was greater than Goldman’s in 2006, is now worth half as much.

Shares of Merrill Lynch were up $1.77, or 3.40%, to $53.80 in late morning trading on Wall Street, well below their 52-week high of $98.68.

Merrill Posts First Quarter Loss, Will Cut 4,000 Jobs

Update: Merrill Lynch reported a first quarter net loss of $1.96 billion, or $2.19 per share, compared to net earnings of $2.16 billion, or $2.26 per share, a year ago.

First-quarter revenue fell 69 percent to $2.9 billion, largely due to write-downs and credit valuation adjustments totaling $4.5 billion related to the company’s CDO holdings.

The company’s net exposure to U.S. subprime residential mortgages fell from $2.7 billion to $1.4 billion during the first quarter, but exposure to Alt-A mortgages increased to $3.2 billion from $2.7 billion.

Net exposures related to prime residential mortgages increased to $30.8 billion, and non-U.S. residential mortgages declined to $8.8 billion.

The New York City-based banking giant also said it will reduce its headcount by 4,000 employees, or 10 percent of staff excluding FAs and investment associates, resulting in a $350 restructuring charge to be realized in the second quarter.

During the first quarter, Merrill cut 1,100 jobs, primarily related to the closure of First Frankin and the sale of ML Capital, leaving the company with a total workforce of 63,100.

Shares of Merrill Lynch, which have fallen more than 50 percent over the past year, were up 60 cents, or 1.34%, to $45.49 in midday trading on Wall Street.


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