"Startling" $8 billion loss for Merrill Lynch

Merrill Lynch reported the biggest quarterly loss in its 93-year history after taking $8.4 billion of write-downs, almost double the financial firm's forecast three weeks ago.

The write-downs on subprime mortgages, asset-backed bonds and leveraged loans led to a third-quarter loss of $2.24 billion, or $2.82 a share, six times more than Merrill estimated on Oct. 5. Chief Executive Officer Stanley O'Neal said Wednesday that Merrill may sell assets to shore up its balance sheet.

Merrill's stock fell the most in five years, its credit rating was cut and the perceived risk of default on the company's bonds rose after O'Neal said the firm misjudged the severity of the decline in debt markets since July.

"We're very disappointed," said Rose Grant at Eastern Investment Advisors in Boston. "I don't think Stan O'Neal will step down, but you do have to look at top management and wonder why they didn't know the extent of this loss."

Standard & Poor's, Fitch and Moody's lowered their assessments of Merrill's credit. S&P cut its rating on Merrill's senior unsecured debt to A+ from AA-, describing the quarter's loss as "startling" and citing "management's miscues" that raised concern about the firm's risk controls and business strategy.

Merrill shares dropped 5.8 percent to $63.22 Wednesday.

O'Neal, on a conference call with analysts, said he was "continuing to resize" the firm's balance sheet.

Merrill said its holdings of so-called collateralized debt obligations, or CDOs, along with other securities and loans linked to subprime mortgages, lost $7.9 billion of their value in the quarter. CDOs are bonds created from pools of debt securities and loans.

The size of the write-down increased from $5 billion after Merrill conducted "additional analysis" since the firm's Oct. 5 announcement, O'Neal said.

Merrill also wrote down the value of leveraged buyout loans the firm couldn't sell to investors by $463 million, after underwriting fees.

Taken together, the charges are the biggest ever by a Wall Street firm, said Charles Geisst, a finance professor at Manhattan College.

"It's safe to say this is the largest write-down" by a U.S. securities firm, said Geisst, the author of "100 Years of Wall Street." "The only other time we had such big losses was the Third World debt crisis in the 1980s. Even then, the losses didn't match this one."

Slumping credit markets have led to the dismissal of UBS CEO Peter Wuffli and Bear Stearns co-President Warren Spector, and resulted in Lehman Brothers, E*Trade Financial, Citigroup and Merrill losing more than 20 percent of their stock-market value.