| NEW YORK
NEW YORK Merrill Lynch & Co Inc MER.N reported on Wednesday the biggest quarterly loss in its history after writing down $8.4 billion, mostly from bad investments related to risky subprime mortgages.
"The bottom line is we got it wrong by being overexposed to subprime," Merrill Lynch Chairman and Chief Executive Stan O'Neal said on a conference call. "And we suffered as a result of an unprecedented liquidity squeeze and deterioration in that market. No one, no one is more disappointed than I am in that result."
Merrill was the only big Wall Street firm to post a third-quarter loss. And its write-downs, before hedges, were bigger than the combined $3.6 billion in write-downs and charges recorded by rivals Goldman Sachs Group Inc (GS.N), Bear Stearns Cos Inc BSC.N, Morgan Stanley (MS.N) and Lehman Brothers Holdings Inc LEH.N.
"This is a bloodbath for certain. It speaks very poorly to Merrill's risk management practices," said Bill Fitzpatrick, an analyst at JohnsonFamily Funds in Racine, Wisconsin, which invests $1.8 billion but does not own Merrill shares.
"Clearly, heads are going to roll, and I wouldn't be surprised to see meaningful near-term layoffs," he said.
The size of Merrill's write-down was significantly higher than the $5.5 billion it forecast earlier this month.
Merrill Lynch shares closed at a two-year low, down 5.8 percent at $63.22 on the New York Stock Exchange. All three major credit rating agencies cut their ratings on Merrill Lynch, with Standard & Poor's calling the company's loss "startling."
The stock is down 32 percent while the Amex Securities Broker Dealer Index .XBD is off 5.6 percent.
Merrill Lynch's third-quarter net loss was $2.3 billion, or $2.85 a share, from continuing operations, compared with a profit of $3 billion, or $3.14 a share, a year earlier.
"There's not much to like about this performance," Credit Suisse analyst Susan Roth Katzke said in a research note.
More write-downs could be coming if the world's largest brokerage further cuts the value of its remaining $20.9 billion exposure to collateralized loan obligations and subprime mortgages. O'Neal said the company was still working to resolve the impact of loans to people with weak credit.
"I'm not going to talk around the fact that there was some mistakes that were made," O'Neal said. "I am accountable for the mistakes as I am accountable for the performance of the firm overall, and my job, our job, the leadership team's job is to address where we went wrong."
After reexamining its positions on collateralized debt obligations, it used more conservative assumptions for valuing those assets. That led to the bigger-than-expected $7.9 billion write-down on CDOs and subprime mortgages.
Merrill also had a $463 million write-down, after fees, on commitments that include loans for corporate takeovers.
O'Neal cited continued uncertainty in the market for subprime mortgages as defaults on those loans continue to rise and sap the strength of the U.S. economy.
Camilla Petersen, an analyst who covers financial stocks for Atlantic Equities in London, called the losses in Merrill's fixed-income portfolio "pretty spectacular."
"I think it shows two things: sloppy risk management and very aggressive risk taking," Petersen said. "They've tried to diversify away from their core strengths, which are equities, investment banking and wealth management, all of which did very well during the quarter."
She said Merrill has a track record of going into businesses in a big way and then having to retrench.
"Merrill did that with energy -- entered the business and exited and now has gone back in," she said, citing one example.
(Additional reporting by Jonathan Stempel in New York and Olesya Dmitracova in London)