Merrill swings to a record $10 billion loss

Nation's largest brokerage gets battered by $14.6 billion in writedowns, and hires former Goldman risk officer.

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By David Ellis, writer

Merrill's fourth-quarter loss was its worst ever, as it was hit by $14.6 billion in writedowns.
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NEW YORK ( -- Merrill Lynch & Co. Inc. swung to its worst quarterly loss ever Thursday, as it reeled from a giant $14.6 billion hit stemming from the mortgage crisis and credit crunch.

Merrill (MER, Fortune 500) shares tumbled nearly 8 percent in afternoon trading on the New York Stock Exchange on the results, which were far worse than Wall Street had expected.

For the quarter, Merrill posted a loss from continuing operations of $10.3 billion, or $12.57 a share. On a net basis, the company reported a loss of $9.91 billion, or $12.01 a share. The results were the worst in the company's 94-year history.

In the year-earlier period, Merrill reported a net profit of $2.3 billion, or $2.41 a share.

The company reported a loss of $8.19 billion on revenue, compared to $8.61 billion a year ago.

Merrill had been expected to report a loss of $4.93 a share on revenue of $398.5 million, according to analysts polled by earnings tracker Thomson Financial.

"It was horrific, but that was to be expected," said Ryan Lentell, an analyst at mutual fund research firm Morningstar. "Everyone knew it was going to be a terrible quarter."

Merrill's losses were driven primarily by a $11.5 billion writedown the company took on its subprime residential mortgages and collateralized debt obligations - an investment vehicle that buys and sell bonds. The company also reported a $3.1 billion writedown on hedges with financial guarantors.

Prior to Merrill's announcement, there had been intense speculation that the company could write down as much as $15 billion.

During a conference call with analysts, John Thain, the firm's recently installed chairman and CEO, said he felt "comfortable" with the writedowns the company took.

"We took a pretty prudent view," he said, noting that the goal was to get these toxic securities to a value at which they could be sold.

Despite the drastic reduction in value of these securities, Thain said in a televised interview Thursday that he could not rule out more writedowns altogether.

He said during the call with analysts that one of the keystones of his focus would be improving risk management at the firm.

To that end, Merrill said Thursday that Noel Donohoe, who used to head risk management at Goldman Sachs (GS, Fortune 500), was joining the firm. Donohoe will serve as co-chief risk officer alongside Ed Moriarty, who was appointed to the position in September. Both men will report directly to Thain, the company said.

So far, Merrill Lynch has written down more than $20 billion as a result of its exposure to mortgage-related securities.

Among its various business divisions, Merrill's fixed-income, currencies and commodities business was hardest hit during the quarter, reporting a decline in revenue of $15.2 billion.

Other units, including Merrill's retail brokerage business and its wealth management division, fared significantly better, reporting double-digit revenue increases.

Despite taking both the quarterly loss and an $8 billion loss for the the full fiscal year, Thain said the banking giant remained well-capitalized as it entered 2008.

He also told analysts that other than in the company's fixed-income and mortgage origination businesses, it was unlikely that there would be major job cuts.

"It's not going to be dramatic," he said.

Earlier this week, Merrill announced it had raised $6.6 billion in capital from outside investors, including investment funds run by the governments of Kuwait and Korea and Japan's Mizuho Corporate Bank.

That multi-billion dollar cash injection came on the heels of a $6.2 billion investment Merrill received last month from Singapore's state-run Temasek Holdings and Davis Selected Advisors.

Faced with a capital crisis as the year came to a close, Thain said the company considered other moves to raise cash, including selling its 20 percent stake in financial information provider Bloomberg LP, but opted instead to look to outside investors. Thain stressed the company would not sell its stake in the asset manager BlackRock (BLK) either.

The loss reported Thursday marks the first set of quarterly results Merrill has posted since Thain took the helm in December after the departure of Stanley O'Neal, who stepped down amid the $2.3 billion loss and $7.9 billion writedown Merrill reported in the third quarter.

Merrill's results cap a particularly active week for the financial services sector. Earlier this week, Citigroup (C, Fortune 500) recorded a $9.8 billion loss and took an $18.1 billion writedown on its subprime positions. Both JPMorgan Chase (JPM, Fortune 500) and Wells Fargo (WFC, Fortune 500) fared better even though profit fell by more than a third at both firms.

Seattle-based Washington Mutual (WM, Fortune 500) was due to report its fourth-quarter results after the closing bell Thursday. To top of page

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