Uh oh, the economic meltdown is getting serious

Merrill rocked by $11.5bn subprime writedown

By Ben White in New York

Merrill Lynch on Thursday disclosed a big hit from the subprime mortgage crisis, saying it lost nearly $10bn in the fourth quarter following an $11.5bn asset writedown.

The ailing brokerage posted a net loss of $9.83bn, or $12.01 a share, compared with a profit of $2.3bn, or $2.41, a year earlier. Merrill had negative revenue of $8.19bn, down from revenue of $8.39bn a year earlier. The results badly missed analyst projections for a loss of $4.70 a share

Merrill also disclosed a $3bn writedown related to the firm’s hedges with bond insurance groups, known as monolines, which are facing significant financial distress. The $3bn writedown raises the question of whether other banks will have to make similar reductions given the precarious state of the bond insurers.

The group said it lost $8.6bn for all of 2007, a year in which it ousted its chief executive and lost nearly half its market value following the decline of mortgage-related securities held on its balance sheet.

John Thain, the former New York Stock Exchange chief executive charged with fixing Merrill, has moved swiftly to bolster the brokerage’s ailing balance sheet. On Tuesday, he said Merrill would raise $6.6bn from investors in Korea, Kuwait and Japan, adding to a previous $6bn capital infusion.

”While the firm’s earnings performance for the year is clearly unacceptable, over the last few weeks we have substantially strengthened the firm’s liquidity and balance sheet,” Mr Thain said in a statement on Thursday.

”In addition, a great majority of Merrill Lynch’s key businesses delivered record results in 2007, and as I look ahead to 2008, the firm is intensely focused on continuing this momentum and delivering growth and increased profitability for our shareholders and employees.”

Most of Merrill’s writedown came on the value of collateralised debt obligations, packages of loans often made up largely of subprime home mortgages. Merrill was the largest creator of such securities and was left with a significant inventory after the subprime crisis eliminated investor appetite for the product.

Merrill and Citigroup have been the hardest hit by the subprime crisis and both have turned to government and private investors in the Middle East and Asia to rescue their balance sheets. Citi on Tuesday said it lost nearly $10bn in the fourth quarter following an $18.1bn asset writedown.

Original article posted here.