Merrill Swings to $2B Loss on Writedowns

Updated from 1:55 p.m. EDT

Merrill Lynch(MER Quote) on Thursday swung to a first-quarter loss on continued deterioration of structured finance products and the U.S. mortgage market.

The firm reported a net loss from continuing operations of $1.97 billion, or $2.20 a diluted share, vs. a net profit of $2.03 billion, or $2.12 a diluted share, in the year-ago period. Analysts polled by Thomson Financial had expected a loss of $1.99 a share.

Merrill posted net revenue of $2.9 billion, down 69% from a year ago. Analysts had expected revenue of $2.7 billion.

The losses were fueled by writedowns of roughly $6.6 billion for the quarter, the firm said on a conference call with analysts. Merrill also plans to reduce staffing levels by 4,000, or 10% of the workforce from global markets and investment banking businesses. The cuts will exclude financial advisors and investment associates.

"Despite this quarter's loss, Merrill Lynch's underlying businesses produced solid results in a difficult market environment," Chairman and CEO John Thain said in a company statement. "The firm's $82 billion excess liquidity pool has increased from year-end levels, and we remain well-capitalized. In addition, our global franchise is positioned strongly for the future, and we continue to invest in key growth areas and regions."

Thain reiterated on the company's conference call that the brokerage firm remains well capitalized and does not have plans to raise additional common equity. Still Thain told a group of reporters that the brokerage firm may issue preferred shares, Reuters reported.

CFO Nelson Chai said on a conference call that the positive trading environment drove fixed income trading revenues of $1.9 billion, which excluded marks of $6.6 billion and fair value debt gains of $1.4 billion.

Merrill shares, which initially fell as much as 3.7% Thursday, climbed $1.82, or 4.1%, to $46.71 by the close. But Punk Ziegel analyst Dick Bove, for one, was at a loss to explain why.

"It would be disingenuous of me to indicate that I understood what has happened at Merrill Lynch in the first quarter or that I had any rational way to estimate what the company's earnings are likely to be going forward," he wrote in a note to clients Thursday. "Brokerage firms generally do not provide enough information for anyone to forecast their results. This time it appears to me that the company has provided bits and pieces of data sprinkled through its relatively sparse press release that almost tries to make it more difficult than normal to figure out what has happened."

While a breakdown of the firm's writedowns is not easily discerned from its earnings release, an analysis by TheStreet.com found a net writedown of $6.92 billion. That number is derived by $9.08 billion in writedowns to CDOs, leveraged finance, mortgage exposure, hedges to guarantors, investment banking products and other factors, offset by $2.15 billion in writeups to fixed income clearing, equity markets and commercial real estate.

A more complete picture of the firm's writedowns will not be available until Merrill files its next 10-Q with the Securities and Exchange Commission.

The company's Global Markets and Investment Banking unit, which includes the company's fixed income, investment banking and equities markets businesses, posted a pre-tax loss of $4 billion for the first quarter on revenue of negative $690 million.

Fixed income was particularly hard hit, as revenues totaled negative $3.4 billion for the quarter impacted primarily by losses associated with the ABS CDOs as well as the credit valuation adjustments related to the hedges with financial guarantors. The losses also reflect, to a lesser extent, the writedowns related to leveraged loans and its mortgage exposure.