Thursday, October 25, 2007

The Merrill Lynch write-down

October 24, 2007 Press release:
" Merrill Lynch (NYSE: MER) today reported a net loss from continuing operations for the third quarter of $2.3 billion, or $2.85 per diluted share, significantly below net earnings of $2.22 per diluted share for the second quarter of 2007 and $3.14 for the third quarter of 2006. Third-quarter 2006 net earnings per diluted share, excluding the impact of the one-time, after-tax net benefit of $1.1 billion ($1.8 billion pretax) related to the merger of Merrill Lynch Investment Managers (MLIM) and BlackRock (NYSE: BLK), were $1.97. Third-quarter 2007 results reflect significant net write-downs and losses attributable to Merrill Lynch's Fixed Income, Currencies & Commodities (FICC) business, including write-downs of $7.9 billion across CDOs and U.S. subprime mortgages, which are significantly greater than the incremental $4.5 billion write-down Merrill Lynch disclosed at the time of its earnings pre-release. These write-downs and losses were partially offset by strong revenues in Global Wealth Management (GWM), Equity Markets and Investment Banking, particularly in regions outside of the U.S. The results described above and herein, exclude Merrill Lynch Insurance Group (MLIG), which is reported under discontinued operations."

October 5, 2007 earnings pre-release:
Merrill Lynch & Co., Inc. (NYSE: MER) today announced that challenging credit market conditions will have an adverse impact on its net earnings for the third quarter. The company expects to report a net loss per diluted share of up to 50 cents, resulting from significant negative mark-to-market adjustments to its positions in two specific asset classes: collateralized debt obligations (CDOs) and subprime mortgages; and leveraged finance commitments. These mark-to-market adjustments primarily affect Merrill Lynch's Fixed Income, Currencies & Commodities (FICC) business. The company expects to report revenue growth in excess of 20 percent over the 2006 third quarter in each of its other major business lines: Equity Markets (excluding the firm's private equity business), Investment Banking and Global Wealth Management. Merrill Lynch expects to report a solid revenue performance from the rest of its FICC business, considering market conditions, and expects strong performance from its operations outside the U.S., led by the Pacific Rim region.
"Despite solid underlying performances in most of our businesses in the third quarter, the impact of this difficult market was much more severe in certain of our FICC businesses than we expected earlier in the quarter," said Stan O'Neal, chairman and chief executive officer of Merrill Lynch. "While market conditions were extremely difficult and the degree of sustained dislocation unprecedented, we are disappointed in our performance in structured finance and mortgages. We can do a better job in managing this risk, as we have done with other asset classes, including leveraged finance, interest rate and foreign exchange trading, equity trading, principal investments and commodities."

To put things in perspective.
  1. At its current stock price of $60.18, Merrill Lynch has a market capitalisation of USD 51.7 billion.
  2. Its 2006 net revenues stood at $34.7 billion, and its net earnings at $7.5 billion.
  3. Chairman and Chief Executive Stan O'Neal received a $47.3 million bonus in 2006.His bonus consisted of a $18.5 million cash incentive and a restricted stock award of $28.8 million in addition to an annual salary of $700,000!!!
  4. Meanwhile, Goldman Sachs Chairman and CEO Lloyd Blankfein set the highwater mark for Wall Street bonuses, receiving $53.4 million for 2006.
  5. Over the last couple of years, Merrill Lynch's leadership role in underwriting risky CDOs brought in millions in fees!!!!
  6. October 24, 2007, hit with $7.9 Bn in record write downs....

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