Merrill Lynch Posts $4.65 Billion Loss In Second Quarter

Mortgage Crisis Continues to Take Toll

Merrill Lynch has been hit with $19 billion in losses over the past year.
Merrill Lynch has been hit with $19 billion in losses over the past year. (By Seth Wenig -- Associated Press)
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Washington Post Staff Writers
Friday, July 18, 2008; Page D01

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.

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