NEW YORK Merrill Lynch & Co Inc's shares fell nearly 17 percent on Thursday as worries over Lehman Brothers Holdings Inc's future raised questions on which investment bank may be next to face questions about its survival.
"I think the market's telling you that if Lehman is going to go away, Merrill is probably the next victim," said Malcolm Polley, chief investment officer at Stewart Capital Advisors.
Lehman shares slid 42 percent to $4.22, dragging the entire sector lower. Merrill stock fell was especially hard hit because it is seen as having similar weaknesses, investors said.
Merrill fell $3.87 to $19.43 on the New York Stock Exchange to their lowest level in nearly 10 years. The decline reflected investor concerns that the bank's commercial mortgage exposure might cause more write-downs.
Write-downs of commercial mortgages were in part responsible for Lehman Brothers' record $3.9 billion loss preannounced on Wednesday.
According to reports on Tuesday, Lehman's talks on selling a stake to the Korea Development Bank ended earlier this week. On Thursday, Lehman shares were further pummeled after analysts voiced concern about Chief Executive Dick Fuld's ability to sell a stake in the bank's Neuberger Berman asset management unit.
On Thursday afternoon, sources said Chief Executive Dick Fuld was in talks to sell the whole firm, instead of just a piece of its business.
Merrill Chief Executive John Thain arranged last month to sell about $30 billion in toxic debt to private equity firm Lone Star Funds.
Merrill has written down more than $40 billion over the last year. Earlier this month, Goldman Sachs analyst William Tanona said the bank could still write down bad assets before September 30 in excess of the $5 billion already announced as a result of a deal with Lone Star Funds.
As Merrill's stock declines, however, it will be harder for the bank to raise capital.
"Bear Stearns was the weakest of the investment banks, Lehman Brothers is ... obviously having issues, and then next on the list to worry about if there were to be a domino effect is Merrill Lynch," said Ben Wallace, securities analyst at Grimes & Co, which sold the last of its Merrill shares on Thursday.
Still, he added: "I think people are getting ahead on their worrying,"
(Reporting by Elinor Comlay; editing by Jeffrey Benkoe)