Merrill Lynch suffers its biggest loss ever

Merrill Lynch & Co. Inc. yesterday reported the biggest quarterly loss in its 93-year history after taking $8.4 billion in write-downs, almost double the company's forecast three weeks ago.

The third-quarter loss of $2.24 billion, or $2.82 a share, was about six times greater than the New York company had estimated Oct. 5.

The stiffer write-downs and overall loss called into question how one of the biggest names in finance could be so off the mark.

"We got it wrong. I'm not going to talk around the fact that there were some mistakes that were made," chief executive officer Stan O'Neal told analysts during a conference call. "The market environment has showed renewed signs of volatility and weakness."

Merrill wrote down the value of subprime mortgages, asset-backed bonds, and loans to finance leveraged buyouts. This means the value of these loans was reduced on the company's books.

Merrill's stock fell the most in five years, its credit rating was cut, and the risk of owning its bonds rose after O'Neal said the company had misjudged the severity of the decline in debt markets since July.

Merrill shares dropped $3.90, or 5.8 percent, to close at $63.22 on the New York Stock Exchange.

Investors who had lauded O'Neal for chasing higher returns as the biggest underwriter of securities backed by subprime loans now question his management. O'Neal said the company had increased write-downs after conducting a more conservative analysis of its holdings.

"We're very disappointed," said Rose Grant of Eastern Investment Advisors in Boston. "I don't think Stan O'Neal will step down, but you do have to look at top management and wonder why they didn't know the extent of this loss."

Standard & Poor's, Fitch Ratings Ltd. and Moody's Investors Service all lowered their assessments of Merrill's credit. S&P described the quarter's loss as startling, and cited "management's miscues" that it said had raised concern about the company's risk controls and business strategy.

Merrill's third-quarter revenue fell 94 percent, to $577 million.

Losses in the fixed-income division overshadowed gains from underwriting stocks and providing merger advice.

At Merrill's retail brokerage - the nation's biggest, with a network of 16,610 financial advisers who cater to individual investors - revenue climbed 23 percent to $3.27 billion.

Merrill said its holdings of securities and loans linked to subprime mortgages lost $7.9 billion of their value in the quarter.

The size of the write-downs increased from $5 billion after Merrill conducted "additional analysis" since the company's Oct. 5 announcement, O'Neal said on the conference call.

"We expect market conditions for subprime-mortgage-related assets to continue to be uncertain," he said.

Merrill also wrote down the value of leveraged-buyout loans it could not sell to investors by $463 million, after underwriting fees.

Taken together, the charges are the biggest ever by a Wall Street firm, said Charles Geisst, a finance professor at Manhattan College in New York.

Merrill's write-downs exceeded Citigroup Inc.'s $6.5 billion in the quarter, and increased to more than $30 billion the total third-quarter cost for bad loans and trading losses reported by the world's biggest securities firms and banks.