July 18, 2008 / 12:07 AM / in 10 years

Merrill posts $4.9 billion loss, sells Bloomberg stake

NEW YORK (Reuters) - Merrill Lynch & Co posted a much larger-than-expected $4.89 billion quarterly loss on Thursday after writing down soured debt, and unveiled plans to sell billions of dollars of assets — including a part of its lucrative brokerage business — to shore up capital.

A Merrill Lynch sign is seen in Toronto, April 29, 2008. REUTERS/Mark Blinch

The loss was the fourth straight for Wall Street’s third-largest investment bank, and was more than twice as big as analysts expected. Chief Executive John Thain called the quarter “difficult and disappointing.”

Thain joined Merrill in November to turn around a company that had been rocked by massive write-downs of complex debt securities. But so far this year, the company has racked up more than $7 billion of net losses for common shareholders, as bad investment and business decisions made under ousted former chief executive Stanley O’Neal have haunted Thain.

“They’re moving in the right direction but Merrill still has significant challenges, including material exposure to collateralized debt obligations,” said Chris Armbruster, an analyst at Al Frank Asset Management, which holds 24,000 Merrill shares. “We like the company, but it’s going to be a tough go.”

Merrill’s shares fell $1.83, or 6 percent, to $28.90 in after-hours trading.

Merrill’s shares had risen $2.73, or 9.8 percent, during the day after JPMorgan Chase & Co posted better-than-expected second-quarter earnings and triggered a broader financial rally. But Merrill’s losses may dampen optimism in the financial sector, a day before Citigroup Inc posts results.

Merrill said it is in discussions to sell a controlling stake in its Financial Data Services Inc unit, which provides mutual fund administrative services and retail banking products, to an undisclosed party in a transaction valuing the unit at more than $3.5 billion. The unit is part of Merrill’s brokerage business.

It also said it has completed and is helping finance the long-expected sale of its 20 percent stake in Bloomberg LP, the news and financial data company, to Bloomberg Inc for $4.43 billion.

The quarterly loss applicable to common stockholders was $4.89 billion, or $4.97 per share, after a profit of $2.07 billion, or $2.24 per share, a year earlier.

Excluding restructuring charges, Merrill lost $4.42 per share, far more than the $1.94 per share loss that analysts on average expected, according to Reuters Estimates.

Merrill recorded $9.4 billion of write-downs from exposure to CDOs, residential mortgages, bond insurers and other investments.

It has written down about $40 billion since the credit crisis began a year ago, leading to net losses exceeding $19.2 billion.

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Moody’s Investors Service downgraded Merrill’s long-term debt rating one notch to “A2,” its sixth highest investment grade, and in line with Standard & Poor’s equivalent rating.

Peter Nerby, an analyst at Moody’s, wrote, “Management’s options to sell assets or raise more common equity to offset unexpected losses are now reduced given the difficult industry and capital markets environment.”

Thain, in a conference call with reporters, said that a further downgrade to the bank from either ratings agency would force Merrill Lynch to post significantly more collateral on its trades.

In a conference call with investors last month, Thain said Merrill Lynch would consider selling its 49.8 percent stake in fund manager BlackRock Inc. On Thursday, Thain told reporters that Merrill decided not to sell the stake because it was a “strategic relationship and an asset we wanted to keep.” Merrill brokers distribute BlackRock funds.

Results included losses of $3.5 billion from exposure to CDOs, $2.9 billion related to hedges, $1.7 billion from an investment portfolio of the company’s U.S. banks, and $1.3 billion from residential mortgages.

Merrill said it has reduced staffing by about 4,200 this year, leaving it with about 60,000 full-time employees at the end of June. Thain said he had not made any decisions regarding future layoffs.

Thain said the company has a Tier-1 capital ratio, which measures its ability to cover losses, of about 9.5 percent, well above regulatory minimums.

Analysts expect Citigroup, which has taken more than $46 billion of write-downs and credit losses since the credit crisis began, to report a second-quarter loss well in excess of $3 billion when it releases results on Friday.

Geller & Company and Private equity firm Quadrangle Group LLC advised Bloomberg Inc in that company’s transaction with Merrill.

Additional reporting by Dan Wilchins and Jonathan Stempel; editing by Mark Porter, Phil Berlowitz, Gary Hill

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