Merrill Lynch announced on Friday that it will take a huge third-quarter loss, writing down nearly $5 billion in losses from collateralized debt obligations (CDOs) and the decline of its subprime mortgage portfolio. Subprime mortgages sometimes stand on their own or are used to collateralize CDOs.
In addition to approximately $4.5 billion in losses through mortgages and CDOs,
Merrill Lynch is also writing down another $463 million for corporate buyouts.
Many investment banks got stuck this summer with loans they had pledged to private-equity
firms for major acquisitions.
According to Reuters News Agency, this announcement places Merrill Lynch at
the top of the growing pile of investment and mortgage companies which have
taken hits due to what is now commonly referred to as the subprime mortgage
mess. The losses were mainly through its First Franklin
subsidiary, a large mortgage lender which Merrill Lynch had agreed to acquire
in the fall of 2006.
The loss amounts to approximately $0.50 per share. Reuters quoted several analysts as having expected Merrill Lynch to report earnings on average of $1.24 per share for the third quarter which ended last week. This will be the corporation's first loss since the third quarter of 1998.
Two rating services, Moody's Investment Services and Fitch Rates downgraded Merrill Lynch debt on Friday. The change from stable to negative may make it more expensive for Merrill Lynch to borrow money and could lead to further negative debt adjustments in coming weeks.
Merrill Lynch may be the biggest loser to date but it is hardly alone. Also on Friday Washington Mutual announced a 75 percent drop in its third-quarter income. This would mean that its net income would be around $187 million as compared to $748 million one year earlier
According to the Associated Press, WaMu as it now prefers to be called said its loan loss provision for the quarter will total $975 million. The provision exceeds net charge-offs -- loans written off as having no chance of being recovered -- by $550 million and will write down the value of various loans and portfolios by about $410 million. Loss provisions, on top of paying current charge-offs, are used to cover future losses.
The $410 million includes a write down of $150 million in the value of loans it was hoping to sell to investors and another $150 million in its trading securities portfolio.
Earlier in the week Citigroup Inc. said its quarterly earnings would fall 60 percent from the same quarter in 2006 as it writes down more than $3 billion in securities backed by underperforming mortgages and loans tied to corporate bonds.