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Merrill Takes a Mammoth Hit

The firm predicts a third-quarter loss after $5.5 billion in writedowns.

Merrill Lynch (MER) 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) - Get Report

,

Lehman

(LEH)

and

Bear Stearns

(BSC)

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.

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"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."

The depth of Merrill's despair in the fixed-income area was telegraphed earlier this week, when the company shook up the management of that unit.

Merrill's move comes at the end of a week of writedowns on Wall Street.

Citi

(C) - Get Report

led things off with a $3.3 billion writedown Monday, and big overseas competitors

Deutsche Bank

(DB) - Get Report

and

UBS

(UBS) - Get Report

also took sizable hits.

Unlike Citi chief Chuck Prince, who predicted a return to normal earnings conditions in the fourth quarter, O'Neal was cautious in his outlook Friday.

"Although the outlook for fourth-quarter revenues remains difficult to predict, we continue to see evidence of strong long-term growth trends in each of our global businesses," he said. "While it is very early in the current quarter and despite continued challenges in structured finance, we are beginning to see signs of a return to more normal activity levels in a number of markets."

Merrill fell 23 cents to $74.55.