US: Merrill Lynch Posts Huge Quarter Loss
The losses from bad credit loans incurred by US investment banking giant Merrill Lynch were worse than it at first thought, at $3.4bn (£1.6bn). The losses due to sub-prime mortgages and loans to fund company takeovers were a massive $7.9bn, and Merrill admitted that it had had to take a more conservative view of the value of its assets backing the doubtful debts.
The result of this was that Merrill posted its first quarterly loss for six years, and put Merrill at the top of the list of worst affected institutions from the subprime crisis and credit crunch.
Merrill said: “This is due to additional analysis and price verification ... including the use of more-conservative loss assumptions in valuing the underlying collateral.” It cast some doubts over chief executive Stan O’Neal’s handling of the crisis.
The season of third-quarter results announcements is at-hand on Wall Street, and bosses there were working to try and come up with a standard method of valuing their loans so that the market could make a fair comparison of how the banks had coped. This change in Merrill’s valuation casts doubt on the success of that exercise. There had been some doubts about how low Merrill’s original estimate had been, and Bill Fitzpatrick, an analyst from Johnson Family Funds, said: “This is a bloodbath for certain. It speaks very poorly to Merrill's risk management practices. Clearly heads are going to roll, and I wouldn't be surprised to see meaningful near-term lay-offs.”
Lee Norton, analyst at JS Asset Management concurred, saying that the results brought questions about Merrill’s management, adding that they were paying the price of having reduced numbers of experienced professionals in Merrill’s debt departments, leaving inexperienced heads in charge.
As Merrill reported a net loss of $2.3bn for the quarter, O’Neal blamed sub-prime market uncertainties, saying Merrill was working to resolve the impact.