Money & Company

Tracking the market and economic trends
that shape your finances.

« Previous Post | Money & Company Home | Next Post »

Merrill Lynch gets dunked again by mortgage write-offs

July 17, 2008 |  5:16 pm

From Times staff writer Walter Hamilton:

Merrill Lynch & Co. just threw cold water on the idea that the housing crisis was letting up on Wall Street.

Better-than-expected second-quarter earnings from Wells Fargo & Co. on Wednesday and JPMorgan Chase & Co. this morning had boosted hopes that major banks and brokerages could sidestep more worst-case profit hits from the housing collapse.

Earnings dropped at both Wells and JPMorgan, but far less than analysts had feared. Wells even raised the dividend on its stock.

But Merrill late today reminded investors that the end isn't close for companies that played in the deep end of the pool during the housing boom.

Thainofmerrill The New York-based brokerage giant reported after the end of regular trading that it lost $4.7 billion in the latest quarter, or $4.97 a share, including almost $10 billion in write-offs tied largely to the faltering mortgage-securities market. The numbers were significantly worse than even the most pessimistic analysts had expected.

The news drove Merrill's shares down $1.97 to $28.76 in after-hours trading. The stock had jumped $2.73 to $30.73 in the regular session amid another big rally in financial shares.

The upshot, it seems, is that "the companies that have been steady sources of bad news will continue to be sources of bad news," said John Bollinger, head of Bollinger Capital Management in Manhattan Beach.

Merrill's latest write-offs included $3.5 billion for those exotic -- and toxic -- mortgage securities known as collateralized debt obligations, and $1.3 billion for residential-mortgage "exposures."

On the company's earnings conference call today, one analyst asked Merrill CEO John Thain a technical question about the CDOs "you guys" created.

Thain shot back: "First of all, I take exception to the 'you guys' comment. I did not create any of these CDOs."

Thain, 53, took the brokerage's helm in December after Stanley O'Neal got the boot.

Like others, Merrill has been scrambling to get bad assets off its books. It slashed its U.S. asset-backed CDO exposure to $4.5 billion as of June 30 from $6.7 billion at the end of the first quarter. It whittled its U.S. subprime exposure 29% to $1 billion, primarily because of $544 million in write-offs.

But Merrill and other investment banks are on the proverbial treadmill. As quickly as they're taking mortgage write-offs, the value of the underlying assets is deteriorating further.

The result is that the firms still have significant exposure to the most troubled areas of the mortgage-securities arena. And it's doubtful that Merrill and others can stop the bleeding -- or even accurately calculate how much bleeding they have left to do -- until the housing market stabilizes.

And we all know that hasn't happened yet.

Photo: Merrill CEO John Thain. Associated Press