Merrill Lynch to Report $2.5 Billion in Added Loss By JENNY ANDERSON and LANDON THOMAS, Jr. Published: October 24, 2007 Merrill Lynch is expected to report today that it will add about $2.5 billion more to the $5 billion worth of write-downs it has already announced, according to a person briefed on the situation.
Merrill reports its third-quarter earnings this morning. The bank announced earlier this month that it expected to write down $5 billion because of losses in its fixed-income unit. Most of the losses, the bank said, were tied to the decline in value of complex debt instruments called collateralized debt obligations, whose value has diminished in recent months as credit markets have been hit by a collapse in the subprime mortgage market.
A Merrill spokesman declined to comment.
The additional write-down, coming so soon after the company’s $5 billion charge, may raise more questions about the leadership of E. Stanley O’Neal, Merrill’s chief executive, and the ability of his top executives to assess the firm’s risk exposure.
Since he took over in December 2002, Mr. O’Neal has pushed Merrill into riskier businesses — which, if managed well, tend to produce higher returns. That strategy has taken Merrill Lynch deeper into fixed-income markets like commodities and mortgages, areas outside of its traditional strengths of wealth management and equities.
The foray into fixed income has been messy, with various teams of executives being promoted and then fired.
Last July, Jeffrey W. Kronthal and Harry Lengsfield, two senior fixed-income officials, left after Osman Semerci, who had worked in fixed-income sales in various posts in Asia, was put in charge of a newly formed unit called fixed income, commodities and currencies.
At the time, the global markets and investment banking group was run by Gregory J. Fleming, who oversaw investment banking, and Dow Kim, who oversaw trading. In May, Merrill said that Mr. Kim was leaving to start a hedge fund.
But in July, the credit market collapsed and many Wall Street banks were caught with commitments to lenders that they could not resell and collateralized debt obligations that started to deteriorate sharply in value.
Merrill wrote down $4.5 billion worth of subprime loans and collateralized debt obligations and $463 million, net of hedges, in commitments to fund loans.
As a result of the losses, Mr. Semerci, 39, and Dale M. Lattanzio, the head of structured credit products, were dismissed. David Sobotka, 50, was made the head of fixed income. All ties with Mr. Kim, who had left the firm but still had an office, were cut.
Yesterday, Brad Hintz, an analyst with Sanford C. Bernstein & Company, said he expected Merrill to pull back in fixed income, even though some of the markets were improving.
“After this publicly embarrassing write-down, we would expect senior management to sharply tighten its risk management limits to reduce trading volatility,” Mr. Hintz wrote, referring to Merrill.
He predicted that a “‘back to basics’ retrenchment of the business will cost approximately $1.0 billion in net income,” or about $1.10 in earnings per share for 2008.
After Merrill announced its original $5 billion write-down, Moody’s and Fitch downgraded Merrill’s long-term debt outlook to negative from stable. Moody’s said the write-down, which had been forecast at about $4 billion, exceeded expectations. “As a result, Moody’s assessment of the quality of risk management at Merrill Lynch has diminished.”
In July, after the firm reported second-quarter earnings, Mr. O’Neal sent a memo to employees reassuring them that the bank’s risk management was strong. “We get paid to manage risk and operate in markets during ups and downs,” the memo said. “This time is no different.”
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