April 17, 2008 / 10:49 AM / in 10 years

Merrill Lynch posts big loss, cutting 2,900 jobs

NEW YORK (Reuters) - Merrill Lynch & Co MER.N posted its third straight quarterly loss on Thursday and said it planned to cut 2,900 more jobs after recording more than $6.5 billion in write-downs on subprime mortgages and other risky assets.

The $2 billion loss was worse than Wall Street analysts’ gloomy expectations, but Merrill Lynch’s shares rose 4 percent amid hopes the world’s largest brokerage was closer to seeing improvement.

“My sense is, they tried to clean the bad stuff off the shelves, and they hope it’s mostly in the trash,” said Michael Holland, founder of Holland & Co, which oversees more than $4 billion of assets.

Merrill Lynch’s first-quarter net loss to common shareholders was $2.14 billion, or $2.19 per share, compared with a profit of $2.11 billion, or $2.26 a share, in the same quarter last year.

The loss from continuing operations was $2.20 per share, wider than the analysts’ average forecast of $1.96, according to Reuters Estimates.

Chief Executive John Thain said the bank is well capitalized, but in a conference call with reporters said Merrill Lynch may look to issue preferred shares similar to JPMorgan Chase & Co’s (JPM.N) $6 billion sale on Wednesday.

In January and earlier this month, Thain said Merrill Lynch was not looking to raise more capital.

Thain said on a conference call with investors on Thursday that the three months ended March 31 were “as difficult a quarter as I’ve seen in my 30 years on Wall Street.”

But Thain also implied that Merrill Lynch may post profits in coming quarters, and told a group of reporters that the month of April was generally better than March.

Thain, who took the reins of the world’s largest brokerage in November, is trying to turn the company around as it struggles with the aftermath of bad bets on subprime mortgages and repackaged debt. He is increasing the investment bank’s business in emerging markets and cutting costs to help offset losses on assets.

As part of that cost cutting, Merrill said it was cutting head count by 4,000 from year-end 2007 levels; about 1,100 of the reductions took place in the first quarter. Job cuts will focus on the global markets and investment banking business and support areas, and will not affect retail brokers.

At the end of the first quarter, the company had 63,100 employees. Merrill Lynch expects a second-quarter restructuring charge of about $350 million linked to the job cuts. The reduced headcount is expected to generate about $800 million of cost savings a year.

The company’s book value per share was $25.93 at the end of the quarter. Merrill Lynch’s shares are trading at around 1.8 times their book value, or the accounting value of equity, which is about their historical average.

One analyst at a mutual fund who asked not to be named said that the valuation is relatively high considering Merrill Lynch is scaling back its leverage and is facing a slowing economy.

Net revenue declined 69 percent to $2.93 billion. Analysts had expected $3.35 billion.

    REASONABLE EXPECTATION

    Thain was asked if his comments regarding the company not needing to raise new capital in the equity markets implied that Merrill Lynch was expecting to be profitable in the quarters ahead. “We don’t give guidance, but your comment is a very, very reasonable expectation,” he replied.

    Merrill Lynch hasn’t turned a profit since the second quarter of last year. Since then, the company has recorded more than $30 billion of write-downs and credit losses, spurring it to raise over $12 billion of new capital.

    Moody’s Investors Service said it is reviewing whether Merrill Lynch can improve its capital position amid continued difficult market conditions, and may cut the company’s debt ratings.

    Moody’s estimates Merrill Lynch could face another $6 billion of write-downs in its collateralized debt obligation portfolio. Fitch and Standard & Poor’s affirmed Merrill Lynch’s ratings.

    Merrill Lynch reported losses, write-downs and reserve increases of $1.5 billion on collateralized debt obligations, $925 million on loans financing leveraged buyouts, $3.5 billion on an investment portfolio, more than $800 million on residential mortgages, and $3 billion for exposure to bond insurers.

    That totals about $9.7 billion, but about $3.1 billion of the investment portfolio write-downs did not affect net income, and instead cut into equity on the balance sheet.

    Net income included a $2.1 billion benefit from widening credit spreads on Merrill Lynch’s own debt.

    Merrill Lynch shares closed up 4.1 percent at $46.71 on Thursday. For the year so far, Merrill shares have fallen about 13 percent, compared with a roughly 23 percent decline in the Amex securities broker-dealer index .XBD.

    Additional reporting by Christopher Kaufman and Jonathan Stempel; Editing by Gerald E. McCormick and Tim Dobbyn

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