Into the Red All Over
Friday, January 18, 2008
NEW YORK -- The U.S. stock market Thursday sustained its worst damage this year as major banks announced they were writing off billions of dollars in additional bad debt and signs emerged of even more trouble ahead for the financial and manufacturing sectors.
The day opened with Merrill Lynch, the largest U.S. brokerage firm, reporting the biggest quarterly loss in the firm's 94-year history. Then came the news that housing starts had fallen to a 27-year low in December, followed by a survey by the Philadelphia Federal Reserve revealing a steep decline in regional manufacturing.
By the end of trading, all major stock indicators had plunged by at least 2 percent as investors fled to safer investments such as U.S. Treasurys. The Dow Jones industrial average of 30 blue-chip stocks finished down 306.95, or 2.46 percent, to 12,159.21. The tech-heavy Nasdaq composite index lost 47.69, or 1.99 percent, to 2346.90.
Most dramatic was the drop in the Standard & Poor's 500-stock index, a broader market measure, which was off 39.95, or 2.91 percent. The S&P is down 10 percent for the year and off 14.8 percent from its recent peak.
There is a "parade of evidence that the economy is slowing dramatically," said Todd Clark, director of trading at Nollenberger Capital Partners. "It's like bad news just doesn't go away. It doesn't look like there's any end in sight right now."
Investors are growing especially concerned about the fate of bond insurers, which have guaranteed $2 trillion of debt securities in portfolios around the world. With these securities now increasingly at risk, the bond insurers are coming under pressure and their own ratings could suffer. That in turn could trigger a downgrade in the insured securities, sparking a new round of sell-offs and write-downs.
In restating the value of its assets, Merrill included a $3.1 billion charge on its exposure to bond insurers. All told, Merrill reported a staggering $9.8 billion loss for the fourth quarter after writing down $16.7 billion of assets that have been pummeled by the ongoing credit crunch. Company executives said this significant revaluation would help clear the books.
While these executives did their best to put the dismal results in the rearview mirror, the news fueled fear among investors already concerned about a recession and the ability of federal regulators and Congress to do something about it. Investors immediately sold off shares of Merrill, which closed down by more than 10 percent. For 2007, Merrill lost $7.8 billion, compared with a profit of $7.5 billion in the previous year.
Merrill's fourth-quarter loss, on revenue of negative $8.2 billion, was almost three times larger than Wall Street estimates. Several analysts blamed the gap partially on compensation expenses that were larger than anticipated. Compensation and benefits were $15.9 billion in 2007, up 6 percent from 2006.
Merrill's results cap an abysmal quarter for Wall Street banks. Earlier this week, Citigroup posted a $9.8 billion loss, the largest in its 196-year history, after taking a $23.2 billion write-down, largely on securities backed by mortgages that have deteriorated with rising homeowner defaults. During the housing boom, major Wall Street firms pooled billions of dollars worth of risky subprime mortgages, packaged them into tradable securities and sold them to investors around the globe. Many of the firms also retained chunks of these securities on their balance sheets, which they are now having to write down.
Echoing Vikram Pandit, the chief executive of Citigroup, Merrill Lynch chief executive John Thain called his firm's fourth-quarter results "unacceptable." Both Thain and Pandit are newly installed chief executives, taking the helm as subprime losses forced their predecessors to resign late last year.