Merrill Lynch Losses Underline Subprime Fears

NEW YORK, Oct. 24 --Merrill Lynch on Wednesday posted a loss of $2.2 billion -- its first quarterly loss since 2001 -- which coupled with a poor homes sales report and a turbulent stock market raised fears that weakness in housing and the financial system posed a bigger threat to the broader economy than previously thought.

The investment bank, whose loss was far worse than what the firm forecast less than three weeks ago, said it had to write down its collection of mortgage-backed assets by $7.9 billion, up from its earlier estimate of $4.5 billion. Some investors saw the Merrill loss as a sign that the financial industry still might not have a full grip on problems related to risky, subprime loans.

"We got it wrong," Merrill chairman and chief executive E. Stanley O'Neal said in a morning conference call with investment analysts. "We made a mistake. There were some errors of judgment made in the business itself and in the risk management function."

O'Neal left the door open to further write-downs, saying that the firm expected "market conditions for subprime mortgage-related assets to continue to be uncertain."

Combined with new data about flagging sales of existing homes, Merrill's disclosure pushed U.S. markets sharply lower, although the major indices recovered in the final hour of trading. A rally late in the day has been a common theme in the past several months of volatile trading, and some traders attributed Wednesday's recovery to program trades kicking in.

The Dow Jones industrial average, down by as much as 200 points, ended the day down by a point, to 13,675.25. The broader Standard & Poor's 500-stock index fell 3.7 points, or 0.2 percent, to 1,515.88. The tech-heavy Nasdaq composite index lost 24.5 points, or 0.9 percent, to close at 2,774.76.

"On the fundamental economics, there's a perception that things are getting worse," said Kenneth Kim, an economist at Stone & McCarthy Research Associates. "On the credit market problems, people had started to think the worst was behind us. Now they think that's not necessarily the case."

The latest report from the National Association of Realtors showed that sales of existing homes fell 8 percent in September, to about 5.04 million, the lowest pace since the trade group began tracking that data in 1999. Sales were down 19.1 percent compared with September 2006. Median prices also declined to $211,000, down 4.2 percent compared with a year ago.

The numbers, analysts said, reflect the struggle home buyers face as they try to secure loans as lenders tighten standards and charge more for so-called jumbo loans above the $417,000 level that is insured by Freddie Mac and Fannie Mae.

"It's bad. Let's not mince words, sales really are in a downturn," said Michael D. Larson, a real estate analyst with Weiss Research of Jupiter, Fla. Sales are down 30 percent compared with the peak in September 2005, he noted.

The collapse of real estate sales and prices has taken a broad toll, hurting construction companies, mortgage brokerages that arrange financing for the deals and the Wall Street firms that bundle the loans into larger, more complex investments. Merrill, the only top Wall Street firm to post a third-quarter loss, is the leading underwriter of collateralized debt obligations, hard-to-value instruments backed by mortgages and other forms of debt.

Many analysts hoped that Merrill would "basically say, 'Here is what it is, it's over with.' That's clearly not the case," said Todd Clark, director of trading at Nollenberger Capital Partners. "O'Neal didnt rule out more write-offs. They've already doubled the thing from what they said two weeks ago. It doesn't look like they have a clue what they've got on their books."