Merrill suffers $5.5B subprime hit

NEW YORK (CNNMoney.com) -- Wall Street bank Merrill Lynch warned Friday it would report a third-quarter loss with its bottom line taking about a $5.5 billion hit as a result of this summer's subprime crisis.

Citing "extremely difficult" market conditions and a lack of liquidity, Merrill said it would post a net loss of up to 50 cents a share when it reports its quarterly results later this month.

The New York-based bank blamed its exposure to the subprime mortgage market and collateralized debt obligations, known as pools of bond securities that are grouped together to help diversify risk.

The company said as a result of its exposure in these two areas it would take a $4.5 billion writedown. It also warned it would take a $967 million writedown on a gross basis due to leveraged loan commitments.

"Despite solid underlying performances in most of our businesses in the third quarter, the impact of this difficult market was much more severe in certain of our FICC [fixed income, currencies and commodities] businesses than we expected earlier in the quarter," Stan O'Neal, Merrill Lynch's chairman and CEO said in a prepared statement.

Morningstar analyst Ryan Lentell characterized the announcement as a "one-time event," saying that it wasn't much of a surprise given similar writedowns announced by other investment banks in recent weeks.

Just this week, both Citigroup (Charts, Fortune 500) and UBS (Charts) took about $3 billion in writedowns, while Washington Mutual (Charts, Fortune 500) announced earlier Friday it expected its earnings to tumble 75 percent because of loan losses and mortgage writedowns.

While some firms like JPMorgan Chase (Charts, Fortune 500) have been mum about their subprime exposure, Merrill's warning appears to be the biggest hit suffered by a Wall Street bank to date.

"That may reflect the fact that Stan O'Neal was rather bullish on subprime as an asset class and maybe that came back to bite him this quarter," said Lentell.

Merrill, which will report third-quarter results on Oct. 24, was originally expected to post a profit of $1.24 per share, according to Thomson Financial.

The company refrained from offering a forecast for the fourth quarter, but noted that its other businesses, such as its investment banking and equity divisions remained healthy during the third quarter, posting revenue growth of more than 20 percent.

"The long-term franchise is still sound," said Lentell. "Going forward, the firm should be in pretty good shape."

Merrill (Charts, Fortune 500) shares jumped more than 2 percent in late morning trade on the New York Stock Exchange.