Merrill Posts Record Loss on $16.7 Billion Writedown

Merrill Lynch & Co., the biggest U.S. brokerage, reported a record loss after $16.7 billion of writedowns on assets infected by subprime mortgages.

The fourth-quarter net loss of $9.83 billion, or $12.01 a share, compared with earnings of $2.35 billion, or $2.41, a year earlier, the New York-based firm said today in a statement. Merrill fell 8 percent in New York trading, the biggest decline since the 2001 terrorist attacks, as the loss was almost three times bigger than analysts estimated and resulted in the first full-year loss since 1989.

We hope it's all written down and they've thrown in the kitchen sink, said Jeffrey Davis, chief investment officer at Boston-based Lee Munder Capital Group, which manages $4.8 billion and holds Merrill shares. Their core businesses have been impaired.

Chief Executive Officer John Thain called the results unacceptable and said on a conference call that Merrill should stop taking risks that have the potential to wipe out profit. Thain joined Merrill last month, replacing Stan O'Neal, whose gamble on building the subprime mortgage business backfired as U.S. homeowner defaults surged to a 20-year high.

Merrill follows Morgan Stanley and Bear Stearns Cos. in reporting a loss, capping Wall Street's worst quarter ever. The five biggest U.S. securities firms, which also include Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc., reported a net total of $10.2 billion in losses. Thain, Goldman's former president, has replaced senior executives and taken steps to replenish capital during the past month by raising $12 billion from outside investors.

Shares Fall

Merrill, down 5.5 percent this year, fell $4.38 to $50.71 in composite trading on the New York Stock Exchange at 1:12 p.m.

The writedown included $11.5 billion to account for the plummeting value of subprime mortgages and related bonds called collateralized debt obligations. Merrill also reduced the value of bond insurance contracts by $3.1 billion, saying provider ACA Capital Holdings Inc.'s credit rating had been slashed below investment grade, making it a less-reliable counterparty.

The firm wrote down the value of other mortgages by $949 million, leveraged loans by $126 million and commercial real estate by $230 million. Its commercial bank units took an $869 million charge for their investments in mortgages and related securities.

Thain is repositioning the firm to start fresh with a strong balance sheet, once these couple of bad quarters get out of the way, said Matthew Albrecht, an analyst at Standard & Poor's in New York who rates Merrill shares hold.

Citigroup Match

The fourth-quarter loss was the same reported earlier this week by Citigroup Inc., which took an $18 billion writedown related to its subprime-mortgage holdings and slashed its dividend 41 percent.

Merrill's fourth-quarter revenue was negative $8.19 billion, as losses in the fixed-income division wiped out all revenue at the firm's investment bank and retail brokerage. At the brokerage, the world's biggest with a network of more than 16,000 financial advisers, revenue climbed 10 percent to $3.31 billion.

Fixed-income trading revenue was negative $15.2 billion and equity trading revenue was $2.17 billion, up from $1.76 billion a year earlier. Debt underwriting generated $217 million in revenue, down 59 percent, while stock underwriting revenue dropped 21 percent to $375 million.

2007 Loss

The company's full-year loss was $7.78 billion compared with record net income of $11.6 billion at Goldman, the biggest U.S. securities firm by market value, and earnings of $3.2 billion posted by Morgan Stanley, the industry's No. 2 firm. Morgan Stanley and Bear Stearns, like Merrill, reported their biggest losses in the fourth quarter. Goldman and Lehman had profits. All the firms are based in New York.

Merrill said compensation costs fell 6 percent to $15.9 billion for the year compared with 2006. Thain has reduced 2007 bonuses in some divisions and cut jobs in the fixed-income unit, where the writedowns originated.

Several executives tied to O'Neal have departed, including former U.S. brokerage chief McIntyre Mac Gardner. Thain also has recruited executives from his most-recent employer, NYSE Euronext, hiring Nelson Chai to replace Jeff Edwards as chief financial officer.

Merrill, the third-biggest U.S. securities firm, fell 42 percent last year in NYSE trading, the third-worst performance among the 12 stocks tracked by the Amex Securities Broker/Dealer Index. Goldman, which profited by betting on a decline in prices for mortgage securities, gained 7.9 percent in the same period.

Goldman Sachs

Merrill, whose market value was greater than Goldman as recently as 2006, is now worth half as much. Thain, 52, worked at Goldman from 1979 to 2004, when he left to become CEO of NYSE Euronext.

The writedowns by Merrill add to more than $100 billion of subprime-related losses reported since May by the world's largest banks and securities firms.

With its capital depleted, Merrill said Jan. 15 that it sold $6.6 billion of preferred stock to a group of investors including the Korean Investment Corp., Kuwait Investment Authority and Mizuho Corporate Bank. The transaction followed the sale in December of as much as $6.2 billion in stock. Thain has freed up at least $2.1 billion in additional capital by selling assets, including Merrill Lynch Life Insurance Co. and Merrill Lynch Capital, a financer of medium-size companies.

Bloomberg Stake

Merrill is a passive, minority investor in Bloomberg LP, the parent of Bloomberg News. Thain said on the conference call that its 20 percent stake isn't for sale, as analysts including Michael Hecht at Bank of America Corp. had speculated. Thain also called the firm's investment in BlackRock Inc., the biggest publicly traded asset manager in the U.S., a core strategic asset.

Before his ouster in October, O'Neal acknowledged that Merrill held onto many of the mortgage securities it created rather than selling them to customers, as it had before the housing market started to slow. O'Neal also bought subprime lender First Franklin Financial Corp. for $1.3 billion at the end of 2006 just as the market for housing-linked securities was beginning to wither.

Thain said today on a conference call with reporters that Merrill eliminated about 1,000 jobs in the fourth quarter, most of them at San Jose, California-based First Franklin.

Merrill held $8.8 billion of subprime mortgages by June and $32.1 billion of collateralized debt obligations, or CDOs, securities packaged from mortgage bonds, loans and other debt.

Rating Downgrade

Many CDOs were downgraded by Standard & Poor's and Moody's Investors Service as an increasing number of borrowers fell behind on home-loan payments, sending prices on some of the securities plunging to as little as 30 cents on the dollar.

Merrill's 1989 net loss of $213 million, under then-CEO William Schreyer, was the first since the firm went public in 1971. That loss works out to about $350 million in 2007 dollars.

Founder Charles Merrill, who burnished his reputation by telling customers to sell stocks just before the 1929 stock- market crash, would be appalled at the firm's bubble mentality of recent years, said Edwin Perkins, author of the 1999 biography of Merrill, Wall Street to Main Street.

Things just get out of control, and once you're involved in it, there's no way to get out of it gracefully, said Perkins, now a professor emeritus of business history at the University of Southern California in Los Angeles.