Merrill Lynch Sees Mortgage Woes Drive $2.31 Billion Loss in Third Quarter

That so-called kitchen sink — a term regularly used to describe a company taking its lumps in one quarter — just got a whole lot bigger. Merrill Lynch said this morning that it has been bitten badly by the mortgage slump, reporting a stunning operating loss of $2.31 billion, or $2.82 per share, compared to a profit of $3 billion, or $3.50 per share, a year earlier.

The third quarter results reflect write-downs of $7.9 billion across CDOs and U.S. subprime mortgages, significantly greater than the incremental $4.5 billion write-down Merrill Lynch had earlier said it expected to report.

Revenues also took a hit, with Merrill booking just $577 million in net revenue during the quarter — a decrease of 94 percent from $9.8 billion in the year-ago period.

From the press statement:

“Mortgage and leveraged finance-related write-downs in our FICC business depressed our financial performance for the quarter. In light of difficult credit markets and additional analysis by management during our quarter-end closing process, we re-examined our remaining CDO positions with more conservative assumptions. The result is a larger write-down of these assets than initially anticipated,” said Stan O’Neal, chairman and chief executive officer. “We expect market conditions for subprime mortgage-related assets to continue to be uncertain and we are working to resolve the remaining impact from our positions,” Mr. O’Neal continued. “Away from the mortgage-related areas, we continue to believe that secular trends in the global economy are favorable and that our businesses can perform well, as they have all year.”

Everyone reading this should take note — Merrill ended up taking an even bigger hit than expected on its mortgage-related securities, writing them down far more than originally anticipated even a few weeks back. The thinking here, clearly, is that things may get worse in the fourth quarter, and I’d expect Merrill is attempting to “kitchen sink” this mess as much as it can for this quarter.

Relative to peers, this suggests that Merrill’s competitors may have more to write down with respect to their own positions in the fourth quarter.