Merrill Lynch Posts $4.65 Billion Loss In Second Quarter
Mortgage Crisis Continues to Take Toll

By Renae Merle and David Cho
Washington Post Staff Writers
Friday, July 18, 2008

Merrill Lynch reported a $4.65 billion loss during its second quarter yesterday, surpassing the expectations of the most pessimistic analysts and underscoring the continued toll of the subprime mortgage meltdown even as economists and policymakers turn their attention to other economic threats such as inflation.

It is the fourth consecutive quarter in the red for Merrill, the nation's third-largest investment bank, and the firm has now piled up $19 billion in losses over the past year because of the credit crisis and its exposure to the troubled mortgage industry.

Merrill's losses continue despite upbeat comments earlier this year by chief executive John Thain, who was quoted in the Wall Street Journal in January as saying that the credit crisis was "for the most part behind us." In April, after Merrill reported a $2 billion loss in the first quarter, Thain maintained that optimism, saying the firm had sufficient capital for "the foreseeable future" and would not have to raise more money from the equity markets.

Thain, who was hired late last year to turn around the firm's fortunes, said yesterday that the company would cut jobs and raise fresh capital by selling about $8 billion of assets. That figure includes the sale yesterday of its 20 percent interest in Bloomberg for $4.43 billion.

"They are raiding the crown jewels to raise capital. This indicates to me that they have some serious problems," said Doug Roberts, an analyst with New Jersey-based Channel Capital Research. "Just when you think they can't write off any more, they exceed estimates."

The results put a damper on the high spirits that had broken out on Wall Street over the past two days. Sparked by better-than-expected earnings from mortgage giant Wells Fargo on Wednesday, financial shares rocketed that day to some of their biggest gains in decades. J.P. Morgan Chase further buoyed investors yesterday by also beating analysts' expectations, pushing the Dow Jones industrial average up more than 200 points.

Merrill's shares rallied as well, gaining 24 percent since Tuesday morning, including a 10 percent gain yesterday. But minutes after its results were announced after the closing bell, the stock fell and was down 7 percent as of 8 p.m.

Merrill's earnings report demonstrated the uneven impact of the credit crisis on the financial system. Some financial firms, such as Wells Fargo, Morgan Stanley and Goldman Sachs have done well and stayed profitable. Merrill, Washington Mutual and IndyMac, which collapsed last Friday, have fared far worse.

This difference reflects the degree and type of risky bets placed by the firms during the housing boom.

Merrill waded deeper into the mortgage mess than its rivals did and is now experiencing losses that devalue its investment portfolio and other assets. Over the past four quarters, Merrill has written down about $30 billion in assets, including $9.7 billion during the second quarter.

Still, Thain was positive about the direction of the firm during a conference call yesterday with analysts and reporters.

"Our core franchise continues to perform well despite the extremely challenging market environment," Thain said.

Merrill posted a second-quarter loss of $4.65 billion ($4.95 a share), excluding businesses it had shut down, compared with a profit of $2.14 billion ($2.10) in the corresponding period a year earlier, the company said in a statement. Analysts' estimates ranged from losses of 93 cents to $4.21 a share, according to surveys taken Bloomberg and Thomson Reuters.

The company reported earnings after a second strong day for U.S. stocks, which shot up as oil prices continued to tumble. Oil prices fell $5.31 to settle at $129.29 a barrel yesterday, dropping more than $10 in the previous two days.

Investors who bought crude oil as a hedge against losses on Wall Street have come to see stocks as a good investment again, said Phil Flynn, an oil analyst at Alaron Trading in Chicago.

The Dow Jones industrial average climbed 207.38 points, or 1.85 percent, to close at 11,446.66. The broader Standard & Poor's 500-stock index gained 14.96, or 1.20 percent, to 1260.32. The technology-oriented Nasdaq composite index gained 27.45, or 1.20 percent, to 2312.30.

Fannie Mae and Freddie Mac continued their rebound yesterday, closing up 18 and 22 percent, respectively.

J.P. Morgan reported that second-quarter earnings fell 53 percent, to $2 billion (54 cents). Analysts had expected earnings per share to fall to 44 cents, according to a Bloomberg survey. J.P. Morgan's shares gained 14 percent yesterday.

Investors shrugged off continued weakness in the housing market yesterday. Home construction, including apartment buildings, grew 9.1 percent in June to a seasonally adjusted 1.066 million annual rate because of a change in New York building codes but otherwise continued to stumble. Excluding data from the Northeastern part of the country, housing starts fell 4 percent from May. Home construction was down 26.9 percent last month compared with June 2007.

The housing market remains weak and is not expected to turn around for some time, said Bernard Markstein, a senior economist and director of forecasting for the National Association of Home Builders. "Housing starts are going to slip further in the next few months," he said.

Staff writer Simone Baribeau contributed to this report.