A Mess at Merrill

Although bursting with liquidity, the world's biggest brokerage continues to disappoint.
Alan RappeportJuly 18, 2008

Merrill Lynch announced a string of disappointing news Thursday evening in an earnings call scheduled after the close of the markets. The struggling investment bank revealed a $9.4 billion write-down, $4.6 billion in second-quarter losses, the sale of its prized 20 percent stake in financial-information firm Bloomberg, and a decision not to go ahead with plans to take offices at the new World Trade Center.

The losses, which exceeded expectations, were due to previous exposure to the mortgage markets and monoline bond insurers. The world’s biggest brokerage firm has now lost nearly $19 billion in the past four quarters. “This was obviously a difficult and disappointing quarter for us in terms of bottom line,” said John Thain, Merrill’s chief executive.

Trying to find some bright spots, Thain said Merrill was awash in liquidity with a record $92 billion excess pool, and that the number of risky assets on its balance sheet had been winnowed. “In spite of the difficult market and difficult quarter, obviously disappointing results, our core franchise continues to deliver,” he said. “We are very liquid.”

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Moody’s Investors Service was not impressed, however, downgrading Merrill’s rating to A2, though its debt was still seen as stable. Standard & Poor’s gave the firm an equivalent rating last month but gave it a negative outlook.

Merrill’s sale of its stake in Bloomberg is aimed at improving its capital position in the face of recent losses. The bank also made a deal to sell a controlling stake in Financial Data Services, a subsidiary that handles administrative tasks for mutual funds and retail banking, for $3.5 billion.

“Let me be clear: we remain focused on continuing to reduce our balance sheet and risk-weighted assets in the coming quarters,” said Nelson Chai, Merrill’s CFO.

Merrill’s results were especially disappointing because two competitors, JP Morgan Chase and Citigroup, beat second-quarter forecasts despite their own continuing write-downs. JP Morgan posted earnings of $0.55 per share, beating analysts’ bets of $0.44. Citigroup’s $2.5 billion loss was also seen as good news, with analysts having predicted the red ink would total nearly $4 billion.