Credit flu worsens for BofA, Merrill
Wall Street’s pain from the housing slump and credit crunch intensified Wednesday as Bank of America Corp. announced layoffs and Merrill Lynch & Co. recorded $3.4 billion more in mortgage-related losses than it had forecast less than three weeks ago.
Merrill’s disclosure raised the prospect that investment banks, which seemed a few weeks ago to be getting a handle on the sub-prime crisis, could face further losses on complex mortgage-related securities.
“The trend is not in the direction of ‘This is over,’ ” said Richard X. Bove, an analyst at Punk Ziegel & Co. “The trend is in the direction of ‘This is building.’ ”
The news from Merrill shocked the stock market and, along with a report of tumbling sales and prices of homes in September, sent the Dow Jones industrial average down more than 200 points before it recovered, in part on rumors of an imminent interest-rate cut by the Federal Reserve. The Dow ended the day virtually unchanged.
The country’s biggest brokerage firm, Merrill wrote off $7.9 billion of mortgage-backed securities. As the company said with frankness not usually found in corporate news releases, that amount was “significantly greater” than the $4.5 billion in write-downs estimated by Merrill on Oct. 5.
“What shocked everyone is the magnitude in terms of dollar amounts,” said Nathan Powell, an analyst at RiskMetrics Group, a financial research firm. “You’re talking about billions and billions of dollars.”
Merrill’s chief executive, Stanley O’Neal, said in the news release that the planned write-offs grew after Merrill “reexamined” its holdings and decided to value them more conservatively.
The soured investments led to a third-quarter net loss of $2.2 billion, or $2.82 a share, more than five times Merrill’s previous estimate of a 50-cent-a-share loss. Merrill shares sank $3.90, or 5.8%, to $63.22, a new 52-week low. The stock is down 32% this year.
Analysts said the results would put pressure on Merrill’s board to fire O’Neal for the company’s failure to foresee the bust that followed the recent booms in mortgage-backed and takeover-related debt.
At Bank of America, a similar failure is leading the company to slash 3,000 jobs and prompting the retirement of the chief of its corporate and investment banking unit.
“We recognize that there are areas where we need to improve and are moving decisively toward that goal,” Kenneth Lewis, Bank of America’s chief executive, said in a statement.
Last week the Charlotte, N.C.-based bank posted a 32% drop in third-quarter profit, in part because of a 74% increase in the amount it added to the provision on its books for loan losses.
Bank of America also said Wednesday that it had launched a “strategic review” of the investment banking unit, whose third-quarter profit sank $1.3 billion, or 93%. The move to review the business suggests the company may scale back its aggressive effort to become a dominant force in investment banking.
The jobs that Bank of America is cutting are concentrated in the investment banking unit and are spread throughout the country, a company spokesman said.
Bank of America released its news after the end of the market’s regular session. Its shares earlier slipped 30 cents to $47.48. The stock is off 11% this year.
Many of the country’s top investment banks have taken huge write-offs in recent weeks to cover losses caused by the financial crisis stemming from mounting defaults on sub-prime mortgages, those made to people with poor credit.
But the Wall Street firms had indicated that the credit markets were beginning to recover, and investors had assumed the worst was over. In several cases, the stocks of investment banks rose after the companies announced write-offs.
New York-based Merrill has been a leading player in the market for so-called collateralized debt obligations, risky securities on which much of Merrill’s losses have occurred.
The firm also sped full bore into the sub-prime business with its purchase of sub-prime lender First Franklin late last year just as mortgage delinquencies were set to accelerate.
Merrill Lynch ousted the head of its fixed-income unit this month.
Eric Fitzwater, senior analyst at research firm SNL Financial, said Merrill’s write-down didn’t indicate that problems were worsening. The company, he said, probably wanted to write off as much bad debt as it could to avoid having to do so in coming quarters. “They’re in bad shape but things don’t seem to be getting any worse,” he said.
But rating firms Moody’s Investors Service, Standard & Poor’s and Fitch Ratings downgraded Merrill’s debt Wednesday and said they would consider further rating cuts for the firm. “The jump in the write-down suggests that management did not fully understand their exposures,” Moody’s analyst Peter Nerby wrote in a report.
