More pain for Merrill Lynch

Wall Street firm's quarterly loss is even wider than expected after $6.6 billion in writedowns, and it plans to cut another 3,000 jobs.

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By Tami Luhby, senior writer

Merrill Lynch has performed worse than its peers on a Standard & Poor's bank index.
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NEW YORK ( -- Ouch! The pain isn't over for Merrill Lynch & Co.

Still suffering from bad bets in the mortgage market, Merrill Lynch Thursday missed even the drastically lowered estimates for its first-quarter results, reporting a net loss of $1.96 billion, or $2.19 per diluted share. It also recorded about $6.6 billion in new writedowns.

The company plans to cut about 3,000 more jobs. It will focus the reductions in its global markets and investment banking division. Merrill Lynch has already eliminated 1,100 positions this year.

The total number of job cuts amounts to a 10% reduction of Merrill Lynch's workforce excluding financial advisers and investment associates.

Merrill Lynch reported revenue of $2.9 billion, down 69% from the prior-year period, primarily due to net writedowns of $2.7 billion in mortgage-related securities and $3 billion in downward revisions of the value of faltering bond insurers' guarantees. It is also writing down $925 million of the value of its leveraged loan portfolio.

Analysts had projected a $1.99 per share loss on a net loss of $1.4 billion and revenue of $3.7 billion.

Wall Street, however, seemed pleased with the results, sending the stock up nearly 2% in afternoon trading.

Credit crisis not over yet

Calling it "as difficult a quarter as I've seen in my 30 years on Wall Street," Chief Executive Officer John Thain said the bank is preparing for slower and tougher times ahead. However, Merrill Lynch remains well-capitalized, he said.

Despite recent upbeat remarks from Wall Street CEOs, Merrill Lynch's results show that the industry is still suffering from the mortgage meltdown that began when the subprime sector crumbled last year.

"Merrill Lynch's and other investment banks' writedowns are a stark reminder that we are not out of the woods yet in terms of the credit crisis," said Octavio Marenzi, head of Celent, a Boston-based financial research and consulting firm. "There is more pain to come and the pressure on earnings is going to continue."

Wall Street was prepared for horrendous results from Merrill Lynch (MER, Fortune 500). Analysts were almost tripping over themselves to cut estimates, suspecting the value of the company's assets had fallen steeply in recent months.

At the start of 2008, analysts expected a profit of $1.52 per share and even a month ago, they were still predicting earnings of 48 cents per share.

Like its peers, the bank is still plagued by declines in the value of assets such as mortgages and leveraged loans and from its exposure to crumbling bond insurers. Merrill Lynch played big in the mortgage market and lost. It continued to issue mortgage-backed securities in 2007, even as the market was faltering.

To compensate for roughly $24 billion in writedowns in the second half of last year, Merrill Lynch raised $12.8 billion in capital during the past two quarters and Chief Executive John Thain said he doesn't plan to raise any more.

Investors question Thain's ability

But investors aren't showing much faith in Thain, who was brought in November to replace Stanley O'Neal after the company reported a record $2.24 billion quarterly loss.

A year ago, the picture was much different. Merrill Lynch was basking in a 31% increase in quarterly profit, as trading revenue and investment banking fees soared. The bank turned in a record performance of $9.9 billion in revenue and $2.2 billion, or $2.26 per share, in net income.

Executives knew the subprime sector was weakening but did not fathom what it would do the storied institution. Jeff Edwards, Merrill Lynch's chief financial officer at the time, sought to assure investors on the April 2007 conference call.

"At this point, we believe the issues in this narrow slice of the market remain contained and have not negatively impacted other sectors," Edwards said.

This year, after three straight quarterly losses, Merrill Lynch highlighted some of the strengths in its other businesses. It garnered record quarterly net revenue in its global wealth management division and had "significant" revenue growth from its stake in BlackRock, an investment management company. It also said it had a "healthy" investment banking fee pipeline, down only 5% overall from the end of 2007.

"Our global franchise is positioned strongly for the future, and we continue to invest in key growth areas and regions," Thain said.

The company has $82 billion in liquidity, more than its funding obligations, executives said on a conference call. Still, Merrill Lynch is looking to lower its capital needs by reducing its balance sheet and trimming back illiquid assets.

The staff reductions will save the investment bank $800 million a year, though it will record a $350 million restructuring charge in the second quarter. Merrill Lynch has 63,000 full-time employees, including 16,600 financial advisers.

At least one analyst was impressed that Merrill's earnings weren't even worse. The wealth management division, for instance, has handled the downturn well, said Dick Bove, analyst with Punk, Ziegel & Company.

"While it's hard to say that a company losing $2.20 a share is doing a good job, this report is better than I expected it to be," Bove said. "Their other businesses are performing much better than I thought they would."

But it's still too early to tell how Merrill Lynch -- or other firms -- will fare over the rest of the year, said Rose Grant, managing director at Eastern Investment Advisors in Boston.

"They are writing off everything they possibly can, but I think we have more to go," Grant said.

Banks reporting mixed results

Merrill is the latest financial firm to report earnings this week. It's been a mixed bag for the others.

Wachovia Corp. (WB, Fortune 500) surprised Wall Street Monday with a first-quarter loss of $350 million, or 20 cents a share, while Washington Mutual (WM, Fortune 500) reported a loss of $1.1 billion, or $1.40 a share, on Tuesday.

On Wednesday, Wells Fargo & Co. (WFC, Fortune 500) reported earnings of 60 cents a share on $2 billion of income and record revenue of $10.6 billion. Earnings fell 11% from a year earlier, but beat analyst estimates. JPMorgan Chase (JPM, Fortune 500) also beat estimates with net income of $2.4 billion, or 68 cents a share, on $16.9 billion of revenue.

Investors are bracing for results from Citigroup Inc. (C, Fortune 500) on Friday and Bank of America Corp. (BAC, Fortune 500) on Monday. Both are expected to turn in weak performances. To top of page

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