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Updated from 7:52 a.m. EDT

Merrill Lynch's


first-quarter earnings fell 61% from a year ago due to a huge charge to cover stock-options accounting. Before the item, earnings surged 36% from a year ago, topping estimates on steady growth in the core brokerage and investment-banking businesses and a surge in principal transactions.

Merrill earned $475 million, or 44 cents a share, in the quarter, down from $1.21 billion, or $1.21 a share, a year ago. The latest quarter reflected an after-tax charge of $1.2 billion. Analysts, who had the charge embedded in their estimates, were forecasting earnings of 32 cents a share in the quarter.

Excluding the charge, Merrill earned $1.7 billion, or $1.65 a share. Total revenue surged 28% from last year to $7.96 billion, also topping estimates of $7.33 billion.

The stock was recently up 3 cents to $78.49.

The big story in Merrill's quarter was the ascendancy of principal transactions, a category that generally comprises a brokerage's in-house trading results. Principal transactions went from being the company's third-largest revenue stream in the year ago quarter to its largest in the most recent, with a top-line gain of 111% to $1.99 billion.

Merrill Lynch's competitors

Goldman Sachs

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Morgan Stanley

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also reported record earnings, and both attributed their success to trading as well. Goldman Sachs, which is generally viewed as the best trading shop, has been criticized for its hedge fund-like strategy. After Merrill Lynch reported earnings, some analysts began to utter the same critique.

"Merrill Lynch's results are impressive, but reveal an increasing dependence on the firm's proprietary trading activities," said Octavio Marenzi, CEO of the consulting firm Celent. "It looks as if Merrill Lynch is becoming a huge hedge fund that also operates an investment bank and brokerage firm on the side." According to Celent's analysis, over 60% of Merrill's growth came from proprietary trading.

Unlike Goldman Sachs, however, Merrill Lynch's trading revenue came mostly from equities, not commodities trading. Commodity trading at Merrill was up from the first quarter last year, but down sequentially, which is surprising given the market's strength last quarter. The company said that it will continue to invest in the business and build out the oil and coal platforms.

Elsewhere, first-quarter revenue rose 19% in Merrill's commission businesses to $1.44 billion, and rose 18% to $1.68 billion in its asset-management and portfolio-services businesses. Merrill announced a deal earlier this year to sell its investment management business to


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Broken down another way, Merrill saw revenue in its global markets and investment banking unit rise 31% from a year ago to $4.6 billion, with net revenue jumping 62% in equity markets, 26% in debt markets and 30% in investment banking.

Revenue in the global private client group rose 13% from a year ago to $2.9 billion. Revenue in investment management rose 38% to $570 million.

On the earnings call, many analysts also pressed management about whether the company intends to buy a bank. In vague responses, executives said they will continue to focus on organic growth and make acquisitions that supplement that. When questioned further, an executive said he didn't "want to suggest that we are more focused on a bank than the other things we are evaluating."