Merrill Lynch & Co., the world's largest brokerage, will report its first quarterly loss since 2001 and faces ``continued challenges'' in credit markets the rest of this year.The 50 cents-a-share loss for the three months ended Sept. 28 resulted from about $5 billion of writedowns on mortgages, asset-backed securities and loans for leveraged buyouts, Merrill said in a statement today. It's the biggest such charge in the New York-based firm's history.
``Investors are relieved when the numbers are revealed,'' said Benjamin Wallace, who helps manage $750 million, including Merrill shares, at Grimes & Co. in Westborough, Massachusetts. ``It shows they're doing something about it, taking the hits and moving on.''
Credit Outlook
Standard & Poor's Ratings Services, Moody's Investors Service and Fitch Ratings changed their outlook on Merrill's credit to negative from stable, with Moody's saying the writedown ``substantially exceeded'' its expectations.
The loss includes a $100 million reduction in the value of Merrill's investment in First Franklin Financial, the subprime lender bought last year for $1.3 billion, according to a regulatory filing.
Merrill announced the loss just two days after firing its head of fixed income, Osman Semerci, 39, and severing ties with Dow Kim, 44, former co-head of investment banking and trading. O'Neal said today that David Sobotka, 50, Semerci's replacement, has a ``proven track record'' managing risk.
Since O'Neal became CEO in December 2002 through yesterday, Merrill shares have increased 72 percent. That trails the gains by the brokerage's four biggest New York-based rivals. Goldman Sachs Group Inc. added 186 percent, Lehman Brothers Holdings Inc. rose 106 percent, Bear Stearns Cos. doubled and Morgan Stanley advanced 79 percent.
Biggest Brokerage
O'Neal,55 said in the statement fourth-quarter revenue ``remains difficult to predict.'' The firm said Jeff Edwards,the Chief Financial officer will host a conference call to discuss the results when earnings are released on Oct. 24.
Merrill has 16,200 financial advisers, compared with almost 15,000 at No. 2 Wachovia Corp., based in Charlotte, North Carolina. It's the second Wall Street firm after Switzerland's UBS AG to disclose a quarterly loss.
All of Merrill's biggest U.S. competitors reported earnings for the quarter ended in August. Goldman's profit rose 79 percent after almost $1.5 billion of losses on leveraged loans. Lehman's total writedown on LBO financing and mortgages was $700 million.
Only New York-based Citigroup Inc., the largest U.S. bank, has reported a bigger writedown, though it still expects a profit.
Goldman Sachs analyst William Tanona cut his estimates for Merrill's 2008 and 2009 earnings, and Punk Ziegel & Co. analyst Richard Bove said he's ``having a hard time'' seeing the writedown as ``a positive development.''
Fixed Income
``I was giving them credit for building a good fixed-income franchise, and to see that kind of a markdown is concerning,'' said Jeff Harte, an analyst at Sandler O'Neill & Partners in Chicago, who rates the stock ``buy.'' ``You start thinking, `What kind of franchise are they building, and how did it get that bad?' ''
Losses from mark-to-market accounting for subprime mortgages and collateralized debt obligations were $4.5 billion, net of hedging gains, Merrill said. The firm blamed ``an unprecedented move in credit spreads and a lack of market liquidity in these securities, which intensified during the third quarter.''
Anticipated losses on non-investment grade lending commitments were $967 million, or $463 million after including underwriting fees, the firm said.
Risk Management
Merrill's report raises ``questions around its risk management capabilities,'' The world's largest banks and securities firms have reported credit and market losses of at least $21 billion after defaults on subprime mortgages -- which reached a five-year high in the second quarter -- contaminated securities backed by home loans and other types of debt.
The loss is Merrill's first since the fourth quarter of 2001 in the aftermath of the Sept. 11 terror attacks that destroyed the World Trade Center.
O'Neal, a former General Motors Corp. executive who joined the firm in 1986, took over in December 2002 from then-CEO David Komansky. He'd been an investment banker, chief financial officer, head of the retail brokerage and president for the firm.
As CEO, O'Neal pushed Merrill to match its rivals by expanding in proprietary trading and private equity, businesses that put more of the company's own capital at risk in exchange for higher returns.
Subprime Purchase
On Dec. 30, he extended the strategy into subprime mortgage lending, which caters to borrowers with the worst credit records, by purchasing San Jose, California-based First Franklin, the 10th-largest subprime lender in 2006 according to Inside Mortgage Finance. At $1.3 billion, it was the most expensive acquisition of a subprime lender disclosed by a Wall Street firm last year.
Like Bear Stearns and Lehman Brothers, Merrill planned to make money by packaging loans into bonds and selling them to investors. Buying a mortgage company helped assure a steady supply for Merrill's debt-securities underwriting.
Less than two months later, the mortgage market began to unravel as HSBC Holdings Plc, the biggest U.S. subprime lender, disclosed that bad-loan provisions increased 20 percent. By early April, New Century Financial Corp., the biggest independent subprime lender, had declared bankruptcy. More than 100 mortgage companies have halted operations, declared bankruptcy or sought buyers this year.
Capacity Glut
Wall Street firms found themselves with too much capacity and few buyers for subprime-backed securities as the worst housing market in 16 years cut demand and loans defaulted at a faster rate than during the U.S. recession in 2001, according to Arlington, Virginia-based Friedman Billings Ramsey Group Inc.
Merrill also had taken a stake in Ownit Mortgage Solutions Inc. in 2005 and began extending a $1.7 billion credit line to Mortgage Lenders Network USA, which at one point ranked as the nation's 15th-largest provider of subprime mortgages. Both fell into bankruptcy.
First Franklin announced last month it was cutting an undisclosed number of jobs and closing some of its 28 loan- processing centers.
``They bought First Franklin right at the peak of the subprime market,'' said Camilla Petersen, an analyst at Atlantic Equities LLP who rates Merrill shares ``neutral.'' ``When you're that heavily involved in a business, and it goes sour, there's not much you can do about it.''
CDO Underwriting
Merrill also embraced underwriting of collateralized debt obligations -- securities that are backed by pools of mortgage bonds, loans or other forms of debt. Merrill was the biggest CDO underwriter last year, selling about $55 billion of the securities, according to Thomson Financial.
In the regulatory filing, Merrill Lynch said it accumulated CDOs on its own books ``for structuring and distribution.''
When the credit crunch hit, Merrill ``was positioned with significant exposure to these securities,'' the company said.
Merrill's writedown represents a bigger slice of the company's stock-market value than the $5.9 billion in credit and trading losses on loans and mortgage-backed securities that Citigroup disclosed on Oct. 1.
For Merrill, it's 7.8 percent of the brokerage's $64.5 billion value as of yesterday's close, compared with 2.5 percent of Citigroup's $232.2 billion in market capitalization before its announcement.
``Everybody's had trouble this quarter, but theirs seems disproportionately large,'' Harte said.
Signs of Recovery
Washington Mutual Inc., the biggest U.S. savings and loan, said today third-quarter profit fell about 75 percent after the Seattle-based company set aside $975 million to cover bad loans and had losses and writedowns of $410 million on mortgages and securities.
Merrill's other biggest business lines -- stock trading, investment-banking and retail brokerage -- showed revenue growth of at least 20 percent in the quarter, O'Neal said in today's statement. The firm is ``beginning to see signs of a return to more normal activity'' in some markets, he said.
``O'Neal isn't going to lose his job over this because he lost money at a time when all the others lost money,'' said Punk Ziegel's Bove. ``We can't get rid of all Wall Street CEOs every time there's a market crisis.''
Merrill is a passive, minority investor in Bloomberg LP, the parent of Bloomberg
Credit Outlook
Standard & Poor's Ratings Services, Moody's Investors Service and Fitch Ratings changed their outlook on Merrill's credit to negative from stable, with Moody's saying the writedown ``substantially exceeded'' its expectations.
The loss includes a $100 million reduction in the value of Merrill's investment in First Franklin Financial, the subprime lender bought last year for $1.3 billion, according to a regulatory filing.
Merrill announced the loss just two days after firing its head of fixed income, Osman Semerci, 39, and severing ties with Dow Kim, 44, former co-head of investment banking and trading. O'Neal said today that David Sobotka, 50, Semerci's replacement, has a ``proven track record'' managing risk.
Since O'Neal became CEO in December 2002 through yesterday, Merrill shares have increased 72 percent. That trails the gains by the brokerage's four biggest New York-based rivals. Goldman Sachs Group Inc. added 186 percent, Lehman Brothers Holdings Inc. rose 106 percent, Bear Stearns Cos. doubled and Morgan Stanley advanced 79 percent.
Biggest Brokerage
O'Neal,55 said in the statement fourth-quarter revenue ``remains difficult to predict.'' The firm said Jeff Edwards,the Chief Financial officer will host a conference call to discuss the results when earnings are released on Oct. 24.
Merrill has 16,200 financial advisers, compared with almost 15,000 at No. 2 Wachovia Corp., based in Charlotte, North Carolina. It's the second Wall Street firm after Switzerland's UBS AG to disclose a quarterly loss.
All of Merrill's biggest U.S. competitors reported earnings for the quarter ended in August. Goldman's profit rose 79 percent after almost $1.5 billion of losses on leveraged loans. Lehman's total writedown on LBO financing and mortgages was $700 million.
Only New York-based Citigroup Inc., the largest U.S. bank, has reported a bigger writedown, though it still expects a profit.
Goldman Sachs analyst William Tanona cut his estimates for Merrill's 2008 and 2009 earnings, and Punk Ziegel & Co. analyst Richard Bove said he's ``having a hard time'' seeing the writedown as ``a positive development.''
Fixed Income
``I was giving them credit for building a good fixed-income franchise, and to see that kind of a markdown is concerning,'' said Jeff Harte, an analyst at Sandler O'Neill & Partners in Chicago, who rates the stock ``buy.'' ``You start thinking, `What kind of franchise are they building, and how did it get that bad?' ''
Losses from mark-to-market accounting for subprime mortgages and collateralized debt obligations were $4.5 billion, net of hedging gains, Merrill said. The firm blamed ``an unprecedented move in credit spreads and a lack of market liquidity in these securities, which intensified during the third quarter.''
Anticipated losses on non-investment grade lending commitments were $967 million, or $463 million after including underwriting fees, the firm said.
Risk Management
Merrill's report raises ``questions around its risk management capabilities,'' The world's largest banks and securities firms have reported credit and market losses of at least $21 billion after defaults on subprime mortgages -- which reached a five-year high in the second quarter -- contaminated securities backed by home loans and other types of debt.
The loss is Merrill's first since the fourth quarter of 2001 in the aftermath of the Sept. 11 terror attacks that destroyed the World Trade Center.
O'Neal, a former General Motors Corp. executive who joined the firm in 1986, took over in December 2002 from then-CEO David Komansky. He'd been an investment banker, chief financial officer, head of the retail brokerage and president for the firm.
As CEO, O'Neal pushed Merrill to match its rivals by expanding in proprietary trading and private equity, businesses that put more of the company's own capital at risk in exchange for higher returns.
Subprime Purchase
On Dec. 30, he extended the strategy into subprime mortgage lending, which caters to borrowers with the worst credit records, by purchasing San Jose, California-based First Franklin, the 10th-largest subprime lender in 2006 according to Inside Mortgage Finance. At $1.3 billion, it was the most expensive acquisition of a subprime lender disclosed by a Wall Street firm last year.
Like Bear Stearns and Lehman Brothers, Merrill planned to make money by packaging loans into bonds and selling them to investors. Buying a mortgage company helped assure a steady supply for Merrill's debt-securities underwriting.
Less than two months later, the mortgage market began to unravel as HSBC Holdings Plc, the biggest U.S. subprime lender, disclosed that bad-loan provisions increased 20 percent. By early April, New Century Financial Corp., the biggest independent subprime lender, had declared bankruptcy. More than 100 mortgage companies have halted operations, declared bankruptcy or sought buyers this year.
Capacity Glut
Wall Street firms found themselves with too much capacity and few buyers for subprime-backed securities as the worst housing market in 16 years cut demand and loans defaulted at a faster rate than during the U.S. recession in 2001, according to Arlington, Virginia-based Friedman Billings Ramsey Group Inc.
Merrill also had taken a stake in Ownit Mortgage Solutions Inc. in 2005 and began extending a $1.7 billion credit line to Mortgage Lenders Network USA, which at one point ranked as the nation's 15th-largest provider of subprime mortgages. Both fell into bankruptcy.
First Franklin announced last month it was cutting an undisclosed number of jobs and closing some of its 28 loan- processing centers.
``They bought First Franklin right at the peak of the subprime market,'' said Camilla Petersen, an analyst at Atlantic Equities LLP who rates Merrill shares ``neutral.'' ``When you're that heavily involved in a business, and it goes sour, there's not much you can do about it.''
CDO Underwriting
Merrill also embraced underwriting of collateralized debt obligations -- securities that are backed by pools of mortgage bonds, loans or other forms of debt. Merrill was the biggest CDO underwriter last year, selling about $55 billion of the securities, according to Thomson Financial.
In the regulatory filing, Merrill Lynch said it accumulated CDOs on its own books ``for structuring and distribution.''
When the credit crunch hit, Merrill ``was positioned with significant exposure to these securities,'' the company said.
Merrill's writedown represents a bigger slice of the company's stock-market value than the $5.9 billion in credit and trading losses on loans and mortgage-backed securities that Citigroup disclosed on Oct. 1.
For Merrill, it's 7.8 percent of the brokerage's $64.5 billion value as of yesterday's close, compared with 2.5 percent of Citigroup's $232.2 billion in market capitalization before its announcement.
``Everybody's had trouble this quarter, but theirs seems disproportionately large,'' Harte said.
Signs of Recovery
Washington Mutual Inc., the biggest U.S. savings and loan, said today third-quarter profit fell about 75 percent after the Seattle-based company set aside $975 million to cover bad loans and had losses and writedowns of $410 million on mortgages and securities.
Merrill's other biggest business lines -- stock trading, investment-banking and retail brokerage -- showed revenue growth of at least 20 percent in the quarter, O'Neal said in today's statement. The firm is ``beginning to see signs of a return to more normal activity'' in some markets, he said.
``O'Neal isn't going to lose his job over this because he lost money at a time when all the others lost money,'' said Punk Ziegel's Bove. ``We can't get rid of all Wall Street CEOs every time there's a market crisis.''
Merrill is a passive, minority investor in Bloomberg LP, the parent of Bloomberg
Tracking the Dow Movement on Friday 5/10/07
The stock market finished the week higher as the Labor Department reported strong September job growth.Early bull charges on in the first few minutes.Doesn't look healthy!
There's a spike down in the last 20 minutes of trading.Caution ahead!!!
Too near the MAV (Support)
The white bullish candlestick has left a long shadow.(a wick)
Is it going to melt?
I suspect it will,WHY...watch out the bad news to come on the financial subprime sector reporting season.
Take profit without hesitation.I am holding position on index futures so Monday there will be gap-ups to realise profit.
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