Merrill Takes a Mammoth Hit

Merrill Lynch (MER Quote) said third-quarter profits will be wiped out by a huge writedown tied to this summer's credit crunch.

The New York-based brokerage firm said it expects to lose 50 cents a share for the quarter, reversing the year-ago $2-a-share profit and falling well short of analysts' $1.24-a-share profit forecast.

Merrill will take $4.5 billion in writedowns on its holdings of collateralized debt obligations and subprime mortgages. It will also write off $967 million worth of leveraged lending commitments.

The charges mean that Merrill has taken the biggest hit on Wall Street from this summer's turmoil in the credit markets. Last month's writedowns at rivals Goldman Sachs (GS Quote), Lehman (LEH Quote) and Bear Stearns (BSC Quote) were generally around the $1 billion range.

The news comes just days after a Goldman analyst predicted that Merrill would take $4 billion in writedowns on CDOs and leveraged lending.

"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 CEO Stan O'Neal.

"While market conditions were extremely difficult and the degree of sustained dislocation unprecedented, we are disappointed in our performance in structured finance and mortgages," he added. "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."