Merrill Leaves Lingering Fears

Merrill Lynch's (MER Quote) massive write-off leaves a black cloud hovering over Wall Street.

Merrill stunned the market Wednesday morning by taking a $7.9 billion write-off of its holdings of subprime-related debt. The move was doubly eyebrow-raising because it came just three weeks after Merrill said the charge would be more like $4.5 billion.

The switch had analysts on Merrill's third-quarter earnings conference call Wednesday morning asking over and over how the firm got to the larger number from the smaller one. The firm disclosed that $6.9 billion of the writedown came from marking down the value of senior portions of collateralized debt obligations, and $1 billion came from subprime revaluations.

But beyond that, there was little useful information from the firm. CEO Stan O'Neal and CFO Jeff Edwards said repeatedly that the increased losses were attributable to the firm's shift to more conservative valuation assumptions. But they didn't specify what the assumptions were, frustrating some listeners -- and giving investors little help in sizing up possible losses at Merrill's Wall Street rivals.

"The level of disclosure is not sufficient to understand how the ABS CDOs have been written down," said Mike Mayo, banking analyst at Deutsche Bank, referring to collateralized debt obligations that hold asset-backed securities. "This is the key question in the marketplace. What is the next shoe to drop?"

If Edwards knows, he didn't say.