Merrill Writedown Grows

Updated from 8:50 a.m. EST

Merrill Lynch(MER) posted a nearly $10 billion fourth-quarter loss and wrote down $14.6 billion in soured mortgage debt and other loans -- numbers that were worse than the most aggressive predictions on the Street.

The New York-based brokerage posted a net loss of $9.8 billion, or $12.01 a diluted share, on negative revenue of $8.19 billion, down from revenue of $8.39 billion for the year prior. A year earlier, Merrill had a net profit of $2.35 billion, or $2.41 per share.

Analysts polled at Thomson Financial were expecting Merrill to record a fourth-quarter loss of $4.70 per share on revenue of $702.1 million.

Citi, Merrill Deals No Threat to Shareholders

The total writedown brings Merrill's marks over the past two quarters to nearly $22 billion.

New CEO John Thain described the losses as "clearly unacceptable" in a press release, but during an analyst conference call, the chief took a relatively positive tone, noting that he would be looking to build the battered firm's franchise.

"While the firm's earnings performance for the year is clearly unacceptable, over the last few weeks we have substantially strengthened the firm's liquidity and balance sheet ," Thain wrote. He replaces former Merrill CEO Stanley O'Neal, who was ousted last year after the firm reported a third-quarter loss of around $8.4 billion.

"I came here because I believe this is a world-class franchise. It has a tremendous brand. It has a unique set of businesses with a global footprint," Thain noted, explaining his reasons for leaving NYSE Euronext(NYX) to join Merrill last year.

Merrill's huge losses come two days after banking giant Citigroup(C) reported a nearly $10 billion loss of its own and an $18.1 billion writedown. Like Merrill, Citi jettisoned its then-CEO, Charles Prince, after it became apparent massive third-quarter writedowns would be necessary.

Also like Citi, Merrill has been aggressively hitting up investors to shore up its balance sheet. On Tuesday, Merrill announced it had raised $6.6 billion in new capital from sovereign wealth funds Korean Investment Corp., Kuwait Investment Authority and Mizuho Financial Group. That sum is in addition to the $6.2 billion Merrill raised from Singaporean investment firm Temasek and Davis Selected Advisors late last year.

"We are very confident we have the capital to go forward in 2008 and beyond," Thain said during the call.

During his introductory remarks, Thain said the firm would not be retrenching in trading, but rather planned on hiring a global head of trading and staff to help manage the company's risk management. He added that the firm would not be risk averse in its strategy going forward, even after smarting from huge losses in esoteric collateralized debt obligations, or CDOs. "The risk that they take will be sized appropriately," he said.

Thain said the firm's structured credit team -- where much of the CDO paper was created -- would be dramatically reduced, but he did not provide specifics. He added that he is happy with its leveraged finance unit.

"I would say that the leverage lending portfolio is significantly better than I thought and the CDO portfolio was worse," Thain said, referring to his expectations on what he would find when he arrived on the scene at beleaguered Merrill.

Merrill CFO Nelson Chai said that the company maintains about $30 billion in CDO exposure.

Thain said that he does not anticipate that the firm's aggressive writedowns now will translate into recoveries on bad mortgage paper should liquidity for the debt improve. "We're being conservative [on writedown assumptions] but I don't think we are likely to get much back on these things," he explained.

Thain also quashed rumors that Merrill would look to shed its 49.8% stake in BlackRock(BLK) and pegged the value of the broker's investment in the firm at $13 billon. Thain on Wednesday was named a director of the firm.

Merrill Lynch shares closed Wednesday up $2.08, or 3.8%, to $55.09, but was trading up 1% at $55.65 in Thursday premarket trading.

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