Merrill Lynch Swings to a Loss, Plans to Cut Another 4,000 Jobs

Merrill Lynch Swings to a Loss, Plans to Cut Another 4,000 Jobs

By KEVIN KINGSBURY
April 17, 2008 11:17 a.m.

NEW YORK -- Merrill Lynch & Co. posted its third consecutive quarterly loss Thursday and said it is cutting 4,000 jobs, as damage from a plunge into risky credit-market activities under its previous chief executive continued to hurt the third biggest U.S. investment bank.
The first-quarter loss of $1.96 billion, or $2.19 a share, was driven by $6.6 billion in write-downs related to mortgages, complex securities called collateralized debt obligations, and loans made to junk-rated companies. Merrill wrote down another $3.1 billion in mortgage-related securities held at its U.S. banks, though that hit only showed up on the broker's balance sheet for accounting reasons.
Merrill CEO John Thain, speaking on a conference call with analysts, said the period was "as difficult a quarter as I've seen in my 30 years on Wall Street" and warned that the next half year will continue to be trying. But he also said business has generally improved in April and told analysts it is "reasonable" to assume that Merrill will be profitable the rest of the year.
The company's shares, which began the day with a plunge to $43.20, were up 1.9% in recent trading at $45.75.
First-quarter results brought Merrill's net losses over the past nine months to about $14 billion, wiping out more than the bank earned in all of 2005 and 2006. Last year's losses forced former CEO Stan O'Neal to step down and raised tensions within the bank's big brokerage unit, which felt it was suffering unfairly due to bad bets by Merrill's traders.
Mr. Thain, who arrived in December, pointed to that wealth-management sector as the highlight of the investment bank's first quarter. The 4,000 job cuts announced Thursday reflect the split. None will affect the firm's 16,660 financial advisors or their support staff, although Merrill is getting tougher on excising unpromising broker trainees. The announced cuts will be targeted at the capital markets and trading side of the company.
Merrill expects about $800 million of annual expense savings from the reduction, but said it will take a $350 million restructuring charge this quarter to account for severance and related costs. The cuts include 1,100 job losses in the first quarter, when Merrill eliminated mortgage lending at a company it bought in 2007 and sold a finance unit. Merrill ended the first quarter with 63,100 employees.

Merrill's net revenue fell 69% to $2.9 billion. The drop and net loss were deeper than Wall Street had expected.

Moody's Investors Service, which had expected Merrill to be profitable all year but now thinks it may take another $6 billion in write-downs in the quarters ahead, issued a warning Thursday that it may downgrade the bank's long-term credit rating.

CHEAT SHEET

What to expect from major companies -- including analyst forecasts for profits and revenues and key themes to keep an eye on -- as they report quarterly earnings.

• Up Next: Citi BofA CountrywideMORE ON MERRILL

• Merrill Close to Hiring Montag 04/17/08
• Page One: Merrill Upped Ante as Bonds Fizzled 04/16/08
• Page One: Investors Hope Banks Stop Bleeding 04/02/08
• Merrill Earnings Are Anyone's Guess 03/26/08

"Management at Merrill Lynch is focusing on the right issues for the rating -- liquidity, capital and de-risking the balance sheet," said Peter Nerby, a senior vice president at Moody's. "However the mortgage market is not cooperating."
Merrill's results reflected $1.5 billion in write-downs on CDOs, bringing the total over the past nine months to more than $18 billion on those securities alone. The bank also took a $925 million write-down on leveraged loans and a $3 billion loss on hedges with bond insurers.
Despite the write-downs, Merrill's CDO exposure actually rose during the quarter -- to $6.7 billion at March 31 from $5.1 billion at Dec. 31 -- as hedges failed. For the same periods, exposure to subprime-residential mortgages was roughly halved to $1.4 billion.
Merrill still holds some $26 billion of CDOs, offset on its books by $20 billion of short positions. Thain aims to sell off the positions, but indicated Thursday he doesn't yet see buyers bidding at prices at Merrill will accept.
Merrill's loss would have been a lot deeper had it not been for a $2.1 billion gain booked on the declining value of the bank's own debt. The move, while counterintuitive, is a legitimate quirk of mark-to-market accounting. Merrill's Wall Street peers also book such benefits, though Merrill's was unusually large.
Merrill recorded nearly $25 billion in write-downs in the second half of 2007. The damage forced the bank to raise $12.8 billion in capital from a number of investors, including three sovereign wealth funds, to shore up its balance sheet.
Thain repeated his assertion that Merrill doesn't need more equity, but the bank will actively try to sell preferred stock and hybrid securities that won't dilute current shareholders.
As for the quarter, Merrill noted its fixed-income, currencies and commodities business -- source of the write-downs -- saw record revenue on interest-rate products and currencies. Revenue fell in the segment's other operations.

Merrill's investment-banking net revenue slumped 40% amid lower leveraged-financed and initial-public-offering activity in the latest quarter. Thain said the company's backlog of deals remains strong, down only about 5% since the end of 2007. Equity-trading net revenue dropped 21% amid weakness in principal-related businesses, including a loss of more than $300 million in its private-equity portfolio.

The company's global wealth-management unit, which includes the company's retail brokerage and its 49% stake in BlackRock Inc., saw pretax earnings dip 8% even as revenue grew 8% to a record $3.6 billion. Mr. Thain said he has no plans to take gains on the BlackRock investment because he doesn't want to damage his relation with the company that provides product for Merrill's salesforce. Mr. Thain is a director of BlackRock.

Merrill's brokerage force, the industry's largest, shrunk by 80, as the bank pushed out lower-performing trainees. The bank's count of experienced brokers rose.
Looking forward, Mr. Thain said he's optimisic about the gradual diminution of credit woes on Wall Street, but is concerned about a spillover effect.

"The real risk going forward here is how much the problems in the financial and credit markets creep into the real economy," he said, singling out energy costs, food prices, unemployment growth and housing. And burgeoning economies such as China and India, where investment banks have been flocking for new business, "are not immune to a U.S. slowdown," he said.
Mr. Thain declined to join his counterparts at Goldman Sachs Group and Morgan Stanley, the largest U.S. investment banks, who last week said Wall Street appears to be in the fourth quarter or ninth inning -- they focused on different sports -- in overcoming its financial crisis.
"I hope they're right," he said.