Merrill Lynch Reports Loss on $8.4 Billion Writedown

Merrill Lynch & Co. reported the biggest quarterly loss in its 93-year history after taking $8.4 billion of writedowns, almost double the firm's forecast three weeks ago.

The writedowns on subprime mortgages, asset-backed bonds and leveraged loans led to a third-quarter loss of $2.24 billion, or $2.82 a share, six times more than Merrill estimated on Oct. 5. Chief Executive Officer Stanley O'Neal said today that the New York-based firm may sell assets to shore up its balance sheet.

Merrill's stock fell the most in five years, its credit rating was cut and the perceived risk of default on the company's bonds rose after O'Neal said the firm misjudged the severity of the decline in debt markets since July. Investors who lauded the 56-year-old CEO for chasing higher returns as the biggest underwriter of securities backed by subprime loans now question his management. O'Neal said the firm increased the writedown after a more conservative analysis of its holdings.

We're very disappointed, said Rose Grant, who helps manage about $2 billion at Eastern Investment Advisors in Boston, including Merrill shares. I don't think Stan O'Neal will step down, but you do have to look at top management and wonder why they didn't know the extent of this loss.

Standard & Poor's, Fitch Ratings and Moody's Investors Service lowered their assessments of Merrill's credit. S&P cut its rating on Merrill's senior unsecured debt to A+ from AA-, describing the quarter's loss as startling and citing management's miscues that raised concern about the firm's risk controls and business strategy.

Financial stocks sank, led by Merrill, which dropped 5.8 percent to $63.22 in New York Stock Exchange trading. Lehman Brothers Holdings Inc., the largest U.S. underwriter of mortgage bonds, declined 1.5 percent to $57.42. Bear Stearns Cos., the second-biggest, fell 2.3 percent to $113.54.

Merrill's third-quarter revenue fell 94 percent to $577 million, as losses in the fixed-income division overshadowed gains from underwriting stocks and providing merger advice. At Merrill's retail brokerage, the nation's biggest with a network of 16,610 financial advisers who cater to individual investors, revenue climbed 23 percent to $3.27 billion.

O'Neal, on a conference call with analysts, said he was continuing to resize the firm's balance sheet. He also said he's weighing potential divestitures of non-core businesses.

Merrill's compensation costs fell by 49 percent from a year earlier to $1.99 billion, indicating that the quarter's losses may reduce year-end bonuses for some of Merrill's 64,200 employees. The firm said today that it remains focused on paying its best performing employees competitively.

`Remaining Impact'

We expect market conditions for subprime mortgage-related assets to continue to be uncertain and we are working to resolve the remaining impact from our positions, he said in the company statement.

Merrill also wrote down the value of leveraged buyout loans the firm couldn't sell to investors by $463 million, after underwriting fees.

Merrill's writedown exceeded Citigroup Inc.'s $6.5 billion and increased to more than $30 billion the total third-quarter cost for bad loans and trading losses reported by the world's biggest securities firms and banks.