Merrill Lynch Posts a $9.8 Billion Loss

By JENNY ANDERSON (NY Times)

Merrill Lynch, a firm one-third the size of Citigroup, posted an equally huge fourth-quarter loss of $9.8 billion on Thursday, fueled by write-downs totaling $16.7 billion, more than double the firm’s 2006 profits.

The staggering losses came from packaging and holding onto complex securities that seemed safe but have recently unraveled. The result was the worst quarterly loss in Merrill Lynch’s history, underscoring both the severity of the credit crunch and the brokerage firm’s failure to adequately understand or manage the risks it was taking.

For the year, Merrill lost $7.78 billion, compared with profits of $7.5 billion in 2006.

Merrill’s stock was down almost 8 percent in midday trading as analysts expressed concern about remaining exposure to the mortgage market — from the subprime market to the safer so-called Alt-A market and commercial real estate — as well as the reality that the firm will be constrained in many aspects of its business.

“There is still a lot of uncertainty ahead for Merrill,” said Brad Hintz, a securities analyst at Sanford C. Bernstein & Company.

Like Citigroup, Merrill Lynch has been forced to tap capital — from locales as close as New Jersey and the Upper East Side of New York, and as distant as Singapore, Korea, Japan and Kuwait —to plug the gaping holes left by losses associated with complex debt instruments packed with mortgages whose value has plummeted. Merrill earlier this week raised $6.6 billion from Korea, Kuwait and Japan. In December, the bank raised an additional $6.2 billion from Singapore’s Government Investment Corporation and Davis Selected Advisors.

John Thain, who took over as Merrill’s chief executive officer in December, called the firm’s results “unacceptable” but expressed certainty that the firm would not have to raise any more money. “We’re very confident that we have the capital base now that we need to go forward in 2008,” he said.

Mr. Thain tried to highlight the positive elements of the firm’s results — record results in equity capital markets, investment banking and global wealth management — but expressed a certain level of dismay at the risks taken to incur such hefty losses. “They shouldn’t be taking risks that wipe out the earnings of the entire firm,” he said, referring to the trading desk.

In his first weeks, Mr. Thain said he focused on three things: the firm’s liquidity, its capital, and its reporting structure, which he said should be flattened to “reduce the siloing that has taken place at Merrill Lynch over the last few years.” Merrill announced the appointment of Noel B. Donohoe to co-chief of risk, joining Edmond N. Moriarty, and Mr. Thain said he would hire a new global head of trading, reporting directly to him.

Merrill losses included a $9.9 billion write-down on collateralized debt obligations, a $1.6 billion write-down on subprime mortgages and a $3.1 billion write-down on exposure to bond insurers, who themselves have come under tremendous pressure for insuring securities that are defaulting a record rates. Other areas for write downs include $900 million in Alt-A and residential mortgages outside the United States and $230 million related to its $18 billion commercial real estate portfolio.

Mr. Thain made it clear that he did not think that so-called asset-backed collateralized debt obligations — instruments that have leveled Citigroup, Morgan Stanley and UBS — would rebound in any way. “I don’t think we’re likely to get back much on these,” he said.

Citigroup wrote down $23.2 billion in mortgage-related losses and provisions for future bad loans while also reporting a $9.83 billion fourth-quarter loss. The firm has raised $19.1 billion from sovereign wealth funds and investors.