First, the funny quote, which is basically the caption of the cartoon I posted yesterday: “It turned out our assessment of the potential risk and mitigation strategies were inadequate,” Merrill CEO Stan O’Neal said on a conference call with analysts.
Second, IF is that if this truly is the “bad news” from MER, then it is now behind us and the stock may be a buy. Note the intraday reversal on the chart above, which is an intraday chart image taken at about noon today. Cheers!
Now on to the article:
Merrill swings to loss on huge mortgage hit
By Greg Morcroft, MarketWatch
Last Update: 11:52 AM ET Oct 24, 2007
NEW YORK (MarketWatch) — Merrill Lynch, the nation’s largest broker, reported its first loss in about 6 years, saying bad judgment and weak risk management strategies forced it to write down almost $8 billion of mortgage and related assets, well above its own previous estimate.
In a testy conference call with investors following the results, Merrill CEO Stan O’Neal took personal responsibility for the loss, but his and CFO Jeff Edwards’ answers about specifics appeared not to satisfy some analysts and investors.
‘It turned out our assessment of the potential risk and mitigation strategies were inadequate. I am accountable for the mistakes…’
— Stan O’Neal, CEO, Merrill Lynch
Merrill shares fell 6.1%, to $63.
“It turned out our assessment of the potential risk and mitigation strategies were inadequate,” O’Neal said. “I am accountable for the mistakes as I am accountable for the performance of the firm overall and my job, our job, the leadership team’s job is to address where we went wrong, what changes were necessary to make sure we respond to changes early, correctly and in every asset class at every stage of market’s evolution,” O’Neal said.
The company reported a loss of $2.24 billion, or $2.82 a share, compared with a year-earlier profit of $3.05 billion, or $3.17 a share.
Losses from continuing operations were $2.85 a share.
The New York securities firm said total revenue dropped to $577 million from $9.83 billion.
On average, analysts polled by Thomson Financial expected a loss of 45 cents a share on revenue of $3.25 billion. Analyst estimates typically exclude items.
Shares fell 2.6% in early trading.
“These losses are relatively larger than those reported previously by other broker dealers and universal banks that have already reported,” DBRS analysts said in a report Wednesday. “Merrill appears to have been much more exposed in its securitization businesses.” Merrill holds the leading position in CDO securitization.
Big jump in write-downs
O’Neal said Wednesday that the firm did not uncover new losses on its balance sheet in recent weeks, but that bigger than expected write-down in the third quarter resulted from deciding to use the more conservative end of its range of estimates.
“As of the date we preannounced, the amount we were indicating was within the range of evaluations and as we looked at it and went back and examined it in the context of why — where the markets are, we believe it’s appropriate to be at the conservative end of the range,” O’Neal said.
On Oct. 5, Merrill said it expected to write down about $4.5 billion of subprime and CDO assets. CDOs, or collateralized debt obligations, are pools of loans, generally mortgages. Trading in some derivatives, such as CDOs, has ground to a virtual halt since August.
As problems in the subprime mortgage market became more apparent over the summer, investors shunned these products and also became unwilling to purchase products that could have any exposure to housing-related assets and other structured products more generally.
O’Neal said conditions in the subprime market remain “uncertain.”
Several executives at rival financial firms have said they don’t expect these markets to ever return to their vigor of recent years.
And, earlier this week, Randall Kroszner, a governor of Federal Reserve Board, said, “I would suggest that….the recovery may be a relatively gradual process and these markets may not look the same when they re-emerge.” See full story.
Pressure to stay on firm
Merrill also said it took a write-down, after fees, of $463 million for loans to firms doing leveraged buyouts. It said it still had $31 billion of similar loan commitments on its books at the end of the quarter.
Merrill said that despite the horrific quarter, its liquidity position remains strong while it attempts to resolve its remaining subprime positions.
It said at the end of the quarter it still has about $15.2 billion of CDO exposure and about $5.7 billion of subprime exposure.
The greater-than-expected losses will keep the pressure on Merrill’s O’Neal, whose decision to take the firm deeper into riskier businesses has been questioned by some analysts and investors.
Merrill is the last of the big brokerage firms to report results. And the results were worse than rivals Goldman Sachs, Lehman Bros., Morgan Stanley and Bear Stearns.
Goldman posted strong growth in its fiscal fourth quarter, as it said it was on the right side of the mortgage trade. The others reported big hits from the mortgage and CDO businesses.
The nation’s three largest banks, Citibank, J.P. Morgan, and Bank of America, also all reported hits from the broken credit markets in their most recent quarters.
“Across Wall Street, firms like Merrill Lynch, Bank of America, and UBS are deciding what investment-banking businesses make sense and where they can be competitive without excessive risk,” Celent analyst David Easthope said on Wednesday. End of Story
Greg Morcroft is MarketWatch’s financial editor in New York.
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