Merrill Posts Second Straight Loss After $11.5 Bln Writedown
Merrill Lynch & Co. reported a second straight quarterly loss after writing down $11.5 billion of subprime mortgages and bonds, ousting its chief executive officer and losing almost half of its market value in 2007.
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, New York-based Merrill said today in a statement. Analysts were estimating the largest U.S. brokerage would post a loss of $4.82 a share, according to a survey by Bloomberg. The decline resulted in Merrill's first full-year loss since 1989.
``While the firm's earnings performance for the year is clearly unacceptable, over the last few weeks we have substantially strengthened the firm's liquidity and balance sheet,'' Chief Executive Officer John Thain said in the statement. 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 is the third of the five biggest securities firms to post a loss, capping the companies' worst quarter ever. Thain, the former president of Goldman Sachs Group Inc., Wall Street's most profitable firm, has replaced senior executives and taken steps to replenish capital during the past month by raising $12 billion from outside investors.
``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.''
Lower Bonuses
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 Cos., like Merrill, reported their biggest losses in the fourth quarter. Goldman and Lehman Brothers Holdings Inc. had profits. All the firms are based in New York.
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 Comparison
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. Citigroup Inc. posted the biggest loss in its 196-year history earlier this week as the largest U.S. bank's subprime mortgage investments and related securities tumbled in value by $18 billion.
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.
Merrill is a passive, minority investor in Bloomberg LP, the parent of Bloomberg News.
Mortgage Securities
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.
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.
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, 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