Merrill Lynch takes $7.9bn sub-prime hit

by Gill Montia

Story link: Merrill Lynch takes $7.9bn sub-prime hit

Merrill Lynch, the US investment bank, has reported that its losses arising from the US sub-prime mortgage crisis are far larger than expected.

In the third-quarter, the bank is writing-down $7.9 billion to cover bad investments and losses from the mortgage-backed collateral it used to raise funds.

In September, Merrill Lynch estimated that it would have to write down $4.5 billion with regard to some of its investments made in bonds backed by mortgage assets but the actual amount is above even analysts’ worst expectations of a $7 billion maximum charge.

The discrepancy in the figures has been explained by Stan O’Neal, the bank’s chairman and chief executive, as the result of losses from its collateralised debt obligations (CDOs) “soaring”.

CDOs are bonds backed by mortgages and some of the bonds held by the bank cannot now be traded, rendering them worthless.

As a result, Merrill is recording a $2.3 billion net loss for the three months to the end of September, compared with a profit of $2.2 billion in the same period of 2006.

Mr O’Neal, whose own position may be threatened by the error in the September write-down estimate, expects “market conditions for sub-prime mortgage-related assets to continue to be uncertain”.