April 17 (Bloomberg) -- Merrill Lynch & Co. posted its third straight quarterly loss and said it will cut about 3,000 more jobs after the credit seizure forced the investment bank to write down at least $6.5 billion of debt.
The first-quarter net loss of $1.96 billion, or $2.19 a share, compared with earnings of $2.16 billion, or $2.26, a year earlier, the third-biggest U.S. securities firm by market value said today in a statement. Analysts had predicted a loss of $1.72 billion, based on estimates compiled by Bloomberg. Merrill rose in New York trading.
Chief Executive Officer John Thain said today he expects ``more difficult'' months ahead. Since taking the job in December, he has sold more than $12 billion of equity to bolster capital and overhauled risk-management after the company booked more than $20 billion of credit-market losses. Merrill's stock has fallen 50 percent in the past 12 months, trailing larger New York-based rivals Goldman Sachs Group Inc. and Morgan Stanley.
``The current environment is still tough,'' said Rose Grant, managing director in the investment-advisory division of Boston-based Eastern Bank Corp., which owns about 66,000 Merrill shares. ``People are still reluctant to buy certain types of assets, and I don't think we'll see the end of that until later this year.''
Merrill gained 87 cents, or 2 percent, to $45.76 at 10:19 a.m. in New York Stock Exchange composite trading, after falling as low as $43.23 earlier today.
`Deteriorating Conditions'
The first-quarter writedowns included $2.6 billion to account for the plummeting value of mortgage-related bonds including collateralized debt obligations. Merrill also reduced the value of bond insurance contracts by $3 billion, and lowered the value of leveraged loans by $925 million.
The markdowns reflected in Merrill's net loss exclude a $3.1 billion drop in the value of securities held in the firm's U.S. banks. Those declines were classified as ``other comprehensive income,'' an accounting category for securities that Merrill expects to keep until they pay off at maturity.
Moody's Investors Service today said it may cut Merrill's credit rating for the second time in six months, citing ``deteriorating conditions in the mortgage market'' and the potential for $6 billion of writedowns in addition to those announced in the past three quarters. Last October, Merrill's rating was lowered one level to A1, the fifth-highest of 10 investment-grade ratings.
Revenue Declines
Merrill's credit-default swaps have climbed to 172 basis points from 131 basis points at the end of November, according to prices from Phoenix Partners Group and CMA Datavision. At the current price, the swaps are trading as if the firm had a Moody's credit ranking of Baa3, the lowest investment-grade rating, according to the ratings firm's credit strategy group.
Credit-default swaps, contracts to protect against or speculate on default, pay the buyer face value if a company fails to adhere to its debt agreements.
Merrill's total revenue fell 69 percent to $2.9 billion in the first three months of 2008 from a year earlier. That included a 40 percent drop in investment-banking fees. The company's brokerage, the world's biggest with a network of 16,660 financial advisers, was the only major division to post a gain. Revenue in the unit increased 7 percent to $3.3 billion.
Fixed-income trading revenue was negative $3.38 billion and equity-trading revenue was $1.88 billion, down from $2.39 billion a year earlier. Debt underwriting generated $231 million in revenue, down 61 percent, while stock underwriting revenue dropped 45 percent to $199 million.
Investor Demands
``Merrill Lynch has to show profitability,'' said Ken Crawford, senior portfolio manager at Argent Capital Management in St. Louis, which owns about 160,000 Merrill shares. ``They can't have negative return-on-equity quarters and expect to make investors happy.''
Merrill's first-quarter loss contrasts with earnings at Goldman, Morgan Stanley and Lehman Brothers Holdings Inc. Even Bear Stearns Cos. eked out a profit of $115 million. A cash shortage forced Bear Stearns to sell itself last month to JPMorgan Chase & Co. for $10 a share. Bear Stearns traded at $158 as recently as last April.
The investment-banking business is grappling with a plunge in fees from advising companies on mergers and stock and bond sales, as CEOs and corporate treasurers hunker down for a recession. Thain also has had to weather the departures of more than a dozen senior executives and traders.
The job cuts announced today are in addition to about 1,000 previously announced. The company eliminated about 650 positions at its San Jose, California-based subprime mortgage lender, First Franklin, and shed others by selling Merrill Lynch Capital, a lender to medium-size companies.
O'Neal's Legacy
Merrill will record a $350 million charge in the second quarter related to the reductions, which will save an estimated $800 million a year, the firm said.
``I don't think anybody would tell you that we'll see earnings and returns from the brokers that will match those of 2006 for years to come,'' said Thomas Jalics, an analyst at National City Bank in Cleveland who helps manage $34 billion.
Under former CEO Stan O'Neal, Merrill paid $1.3 billion for First Franklin in late 2006, just as the U.S. housing market peaked. First Franklin's workforce has been cut to 80 from 2,300.
Thain, 52, said at an April 10 press conference in Beijing that Merrill was ``well positioned in a difficult market.'' The company's stock has fallen 28 percent since Thain became CEO Dec. 1, and yields on its bonds have widened to 3 percentage points over market benchmarks from 2.1 percentage points.
`Very Deliberate'
He joined Merrill from NYSE Euronext, where he was CEO since 2004. Before that, he worked for 25 years at Goldman Sachs. In January, Thain said he wanted to liquidate the firm's CDOs, possibly by selling them to hedge funds and other investors that are pooling money to buy securities at distressed prices. Thain also has said he plans to shut down the structured-finance division that created the CDOs.
At the Beijing press conference, Thain said he used his first two months to shore up Merrill's capital and funding. ``In the last two months, I've been more focused on strategy, getting to know people in various parts of the world,'' he said.
``Thain is a very deliberate thinker,'' said William Fitzpatrick, a bank analyst at Optique Capital Management in Racine, Wisconsin, which oversees $1.7 billion and does not own Merrill shares. ``It doesn't surprise me he's taking his time to get his arms around what exactly he wants to do.''
Merrill owns 49.8 percent of BlackRock Inc., the biggest publicly traded U.S. fund company, whose stock has climbed 25 percent this year. Thain has called BlackRock a ``core strategic asset.'' He also has said he has no plans to sell the firm's passive 20 percent stake in Bloomberg LP, the parent of Bloomberg News.
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