Merrill 3Q loss widens on mortgage-related charges

Merrill, which agreed last month to sell itself to Bank of America Corp, lost $5.2 billion, or $5.58 per share, compared with a loss of $2.2 billion, or $2.82 per share, a year earlier. Analysts polled by Thomson Reuters, on average, forecast a loss of $5.22 per share.

Merrill recorded $3.8 billion in write downs and losses as the credit crisis worsened in September. The charges were tied to investments in government-sponsored entities and other investment banks, which were either taken over by the government or failed during the month.

Merrill did not disclose what types of investments and exposure it had that led to the losses.
"Our results were particularly impacted by the month of September, which represented one of the worst months in the history of the credit markets," Nelson Chai, Merrill's chief financial officer, said during a conference call discussing quarterly results.

As concerns about the stability of financial firms mounted in September, investment bank Lehman Brothers Holdings Inc. filed for bankruptcy protection. Investors became worried that the stand-alone investment bank model was no longer viable and the banks would succumb to liquidity pressures, as banks became nervous about lending to each other amid concerns of more potential failures. Merrill said it had about $77 billion in its excess liquidity pool at the end of September, more than enough to cover all debt maturing over the next year.

As Lehman fell apart, Merrill agreed to the deal with Bank of America, which came just days before the government bailed out insurance giant American International Group Inc. with an $85 billion loan. The all-stock transaction was initially worth about $50 billion. Based on Bank of Americas closing price Tuesday of $23.82 and the number of shares Merrill had outstanding at the end of September, the deal is currently valued at about $32.76 billion.

After the financial fallout in September, the U.S. government approved a plan to invest up to $250 billion in financial services firms to provide additional capital support. Merrill Lynch said it will participate in the program, and expects to issue $10 billion in preferred stock and warrants to the U.S. Treasury Department.

The government plan, which includes additional lending programs for banks, should help improve liquidity in the credit markets, Merrill's chief executive, John Thain, said during the conference call.

"The combination of the capital injection, the access to FDIC-insured debt and the ability to issue (commercial paper) through the Fed facility provides the capital and liquidity and financing that I think is necessary to start to unlock the credit markets, and I think you will gradually see the credit conditions get better," Thain said during the call.

Merrill recorded multiple charges tied to the sale or mortgage-related investments and other securities as it looked to reduce exposure to the troubled market and improve its balance sheet.

As previously announced, Merrill took a write down of $5.7 billion from the sale of collateralized debt obligations, or CDOs.

CDOs are complex financial instruments that combine various slices of debt, and often include pieces of mortgage-backed securities. As mortgages increasingly defaulted over the past year and a half, the value of bonds and other debt backed by mortgages has plummeted in value.

At the end of July, Merrill agreed to sell the CDOs to investment manager Lone Star Funds for about 22 cents on the dollar.

Merrill said it still had $1.1 billion in net exposure to CDOs at the end of the third quarter, down from $4.3 billion the previous quarter.

Another $2.6 billion was written down by Merrill as it completed or planned to complete additional sales to reduce its mortgage exposure.

Merrill was able to offset some of its mortgage-related and investment losses through the previously announced sale of its 20 percent ownership stake in financial data provider and media firm Bloomberg LP. Merrill recorded a gain of $4.3 billion on the sale.

The bank was also able to book gains totaling $2.8 billion tied to the widening of its own credit spreads during the quarter.