Merrill Sheds Profits, Bloomberg (Update2)

"This was obviously a difficult and disappointing quarter for us in terms of our bottom line," CEO John Thain told conference-call listeners after the report was released. He noted that the firm is working toward better risk management and other growth initiatives and that despite negative revenue, Merrill has "more than replaced" the capital it has lost over the past two quarters.

Nonetheless, Moody's downgraded the investment bank's senior long-term debt one notch to A2 from A1, due to its "fourth consecutive quarter of sizeable losses" and estimated that the firm could take an additional $10 billion in pre-tax write-downs from CDOs and mortgages. Its outlook for the firm is stable.

Standard & Poor's, which downgraded Merrill's debt last month, held its ratings steady at A and A-1 with a negative outlook. Credit analyst Scott Sprinzen said the firm's write-downs and charges were "greater than we had previously anticipated."

Fox-Pitt Kelton Cochran Caronia Waller analyst David Trone on Friday downgraded Merrill to underperform from in-line and wrote "the outlook for Merrill's equity is getting dicey."

While the firm still has its 49% interest in investment management firm BlackRock(BLK Quote) to sell if it needs to shore up capital further, that may yield only up to $2.5 billion, Trone wrote. If Merrill continues to post quarterly losses of the second quarter's magnitude, it may have to resort to selling other businesses to cover holes.

"That [management] has to hold a yard sale to keep Merrill afloat is troubling enough, and now the margin for error for equity holders is getting precariously thin," he wrote Friday morning.

Merrill reduced risk-weighted assets by 27% over the quarter, though Thain noted on the conference call that "to cut your leveraged-loan book in half is not the easiest thing to do in this environment." He said that while the firm is eager to shed trouble assets, Merrill will not sell them at prices that are too low.

"I don't think we want to do dumb things," Thain said. "I think we have been pretty balanced in terms of what we sold and at what prices we sold them, we have not simply liquidated stuff at whatever prices we could get."