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Merrill To Write Down Assets

By Alejandro Lazo
Washington Post Staff Writer
Tuesday, July 29, 2008

Merrill Lynch said yesterday that it would take a $5.7 billion write-down in the third quarter as it unloads a large chunk of the risky mortgage-backed securities that have plagued the banking sector during the ongoing credit crunch.

The investment bank also said it would seek to raise $8.5 billion by selling new shares of its stock. Singapore's Temasek Holdings, a sovereign wealth fund that had previously invested in the company and is Merrill's largest shareholder, will buy about $3.4 billion worth of the new shares.

Two weeks ago, Merrill reported a $4.65 billion second-quarter loss. Yesterday's announcement came after the close of financial markets. During regular trading, jitters about the beleaguered financial sector dragged down shares, helping lead to a 240-point drop in the Dow Jones industrial average.

"Right now, what you are seeing with financials is a crisis of confidence," said Doug Roberts, an analyst with Channel Capital Research in New Jersey. "What they are trying to do is get the bomb off their books."

The Dow fell 239.61, or 2.11 percent, to 11,131.08. The blue-chip average is down more than 20 percent from its record close of 14,164.53, which it reached in early October. The Standard & Poor's 500-stock index, a broader market measure, fell 23.39, or 1.86 percent yesterday, to 1234.37. The Nasdaq composite index fell 46.31, or 2 percent, to 2264.22.

Merrill had made bigger bets on the mortgage market than its rivals did and suffered as the housing downturn intensified and defaults spiked on home loans made to high-risk borrowers. The bank has lost about $19 billion in the past year and recorded more than $30 billion worth of write-downs on risky securities in its portfolio.

Much of the write-down reported yesterday stems from the bank's commitments on collateralized debt obligations -- pools of mortgage-backed securities -- that had declined in value. Merrill said it agreed to sell a batch of those securities that had been valued at $11.1 billion for $6.7 billion. The difference, $4.4 billion, makes up a majority of the write-down.

John A. Thain, Merrill's chief executive, said in a statement that the moves were aimed at helping reduce the bank's risk and boost its capital position.

Shares of Merrill fell nearly 12 percent in regular trading, to close at $24.33.

Analysts said the announcement was intended to show that the bank is cleaning up its books and holds the confidence of investors.

Merrill indicated that the securities it kept were of better quality. But some analysts were skeptical that the bank would not have to make further write-downs.

"As the market continues to deteriorate, the price of the paper that they hold will continue to fall," said Ada Lee, an analyst with Sterne Agee. "They need to have capital."

Uncertainty about the health of the financial sector continued to weigh on the markets. Late Friday, federal regulators seized the assets of two troubled banks in the Western United States, the sixth and seventh institutions to fail this year.

Denis J. Amato, chief equity strategist with Ancora Advisors in Cleveland, said more volatility in the stock markets would continue as long as the woes of the nation's big banks continue.

"The recession hasn't fully worked its way through the markets yet," Amato said. "As long as financials stay weak, it is hard to see how the rest of the market can do a lot on the upside."

Movers

Kraft Foods rose $1.45, to $30.83.

Tyson Foods fell $1.14, to $15.09.

General Motors lost 90 cents, to $11.

Amgen gained $6.56, to $60.48.

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