Merrill Warns; Expects Loss in Third Quarter

Merrill Lynch & Co., Inc. said this morning that “challenging credit conditions” will lead the company to post an expected loss of $0.50 per diluted share for the third quarter as the investment bank writes down an estimated $4.5 billion on the value of CDO and subprime mortgage holdings. The firm also said it will write-down an estimated net $463 million of related underwriting fees associated to non-investment grade lending commitments.

The estimated loss actually managed to be worse that analysts have projected. Last week, Goldman Sachs cut its earnings estimate for Merrill to $0.15 per share on expectations that the firm would write off $4 billion in mortgage-related losses.

“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,â€? said Stan O’Neal, chairman and chief executive officer of Merrill Lynch.

“While market conditions were extremely difficult and the degree of sustained dislocation unprecedented, we are disappointed in our performance in structured finance and mortgages. 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.�

Merrill Lynch noted in its press statement that the financial losses are centered primarily in the company’s Fixed Income, Currencies & Commodities (FICC) business, and that other business units are expected to report revenue growth in excess of 20 percent versus the third quarter of 2006.

The investment bank also confirmed numerous earlier reports of a shake-up in the company’s fixed income business, saying that senior vice president David Sobotka was promoted to the position of global head of FICC earlier in the week.

Merrill has, however, remained silent on rumors of a 15 percent job cut in the company’s FICC business unit.