Merrill Lynch’s subprime losses pile up

Amy Scott Oct 24, 2007
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Merrill Lynch’s subprime losses pile up

Amy Scott Oct 24, 2007
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KAI RYSSDAL: There’s a word that’ll be helpful to understand as we make our way into the Merrill story today: writedown — when a company says a certain line item on its books isn’t worth what everybody thought it was…

Merrill Lynch wrote down almost $8 billion in loans and other credit-related investments today, and in the process revealed its first quarterly loss in almost six years.

Marketplace’s Amy Scott reports the writedown was almost $3 billion more than the company predicted just a couple of weeks ago.


Amy Scott: Not even three weeks ago, Merrill Lynch warned investors it might lose up to 50 cents a share in the third quarter. Oops, make that more like $2.82 a share, the brokerage said today. In a conference call this morning, CEO Stanley O’Neal said something you rarely hear from the corner office:

Stanley O’Neal: I am accountable for these mistakes, just as I am accountable for the performance of the firm overall.

O’Neal explained that after the earlier profit warning, Merrill Lynch took a more conservative look at its subprime mortgage holdings and other credit investments. Staffers decided their calculations had been overly optimistic.

The mea culpa impressed analyst Dick Bove with Punk Ziegel — but he still doesn’t buy the numbers. Bove says fancy investments like collateralized debt obligations don’t trade very often, so it’s tough to know what they’re worth. Bove says what’s clear is that they’re worth less and less.

Dick Bove: People aren’t paying the interest on their loans. Therefore, when you spin it up to CDOs and VIEs and SIVs, they’re not getting the interest, those things have to be marked down. We’re just in the beginning of this — it’s gonna continue.

Merrill Lynch was the last of the five big investment banks to report third-quarter earnings, and the only one to report a net loss. But unlike the other banks, Merrill Lynch’s third quarter included September — that means Merrill recorded some losses that other banks haven’t. Some analysts expect to see more bad news when fourth-quarter earnings season rolls around.

In New York, I’m Amy Scott for Marketplace.

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