Page last updated at 19:15 GMT, Thursday, 17 January 2008

Merrill Lynch posts $7.8bn loss

Merrill Lynch building
Merrill's boss said the bank's performance was "unacceptable"

Wall Street banking giant Merrill Lynch has unveiled a huge loss for 2007, crippled by exposure to risky investments in the US housing market.

It made a net loss of $7.8bn (3.9bn) in the 12 months to the end of December from a net profit of $7.5bn in 2006.

The loss includes a massive $14.1bn write-down on failed investments related to sub-prime mortgages.

Merrill Lynch is the latest big bank to reveal losses related to the crisis in the US mortgage market.

Earlier this week, Citigroup and JP Morgan also announced write-downs because of their exposure to the crisis in the sub-prime loan sector, which focused on consumers with poor or non-existent credit histories.

JP Morgan Chase said its earnings for the last three months of 2007 fell 34%, while Citigroup reported a $9.83bn net loss for the last three months of 2007.

'Unacceptable'

In the last three months of 2007 alone, Merrill chalked up losses of $9.83bn - the biggest quarterly loss in its history.

The previous chief executive, Stan O'Neal, stepped down in October because of the bank's poor performance.

Having lost all that financial capital, the risk for Merrill is that its most valuable human capital - those execs untainted by sub-prime - will flee
Robert Peston
BBC Business Editor

New boss John Thain said while the firm's performance was "clearly unacceptable", Merrill had been able to strengthen its balance sheet over the last few weeks.

"I don't think you should anticipate any further problems of this magnitude," Mr Thain said.

"There would have to be something incredibly bad out there to have this happen again, and our whole goal is to get 2007 behind us."

Mr Thain is the former president of Goldman Sachs, one of the few Wall Street firms to have so far come through the sub-prime crisis largely unscathed.

Lifeline

BBC Business Editor Robert Peston said that Merrill has only survived thanks to lifesaving capital from the cash-rich economies of Asia and the Middle East.

MAIN SUB-PRIME LOSSES SO FAR
Citigroup: $18bn
Merrill Lynch: $14.1bn
UBS: $13.5bn
Morgan Stanley $9.4bn
HSBC: $3.4bn
Bear Stearns: $3.2bn
Deutsche Bank: $3.2bn
Bank of America: $3bn
Barclays: $2.6bn
Royal Bank of Scotland: $2.6bn
Freddie Mac: $2bn
JP Morgan Chase: $3.2bn
Credit Suisse: $1bn
Wachovia: $1.1bn
IKB: $2.6bn
Paribas: $197m
Source: Company reports

Merrill Lynch said on Tuesday it had won fresh backing totalling $6.6bn from the Kuwait Investment Authority, the Korean Investment Corporation, a private Saudi Arabian fund and other investors.

Rivals Citigroup, UBS and Morgan Stanley have raised capital from similar sources.

The BBC's business editor said the damage to Merrill was not just financial.

"Having lost all that financial capital, the risk for Merrill is that its most valuable human capital - those executives untainted by sub-prime - will flee," he said.

Widespread woes

Banks are struggling to calculate how much their investments in assets backed by sub-prime mortgages are actually worth, which is why they are reporting massive write-downs.

"It is a shock to the system, they are trying to get as much transparency as possible about their subprime exposure," said Mark Durling at Brewin Dolphin Securities.

"They're being ultra-conservative here."

During the US housing boom, the sub-prime market expanded significantly.

But a series of US interest rate rises over two years meant many sub-prime borrowers could no longer afford their monthly payments, causing them to default on loans.

Banks had packaged up these loans into financial instruments known as collateralised debt obligations and sold them on to investors.

Demand for CDOs dried up as the scale of defaults emerged, leaving banks nursing huge losses.

Merrill was among the largest creators of such securities.


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