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Analysts See Much Higher 2008 Loss for Merrill

Friday, 18 Jul 2008 11:43 AM

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Wall Street analysts widened their 2008 loss estimates for Merrill Lynch & Co on Friday, a day after the investment bank posted a quarterly loss much bigger than market expectations and unveiled plans to sell assets to shore up capital.

Merrill, Wall Street's third-largest investment bank, posted a $4.9 billion loss on Thursday, racking up losses of $19 billion over the past four quarters, effectively wiping out four years of profit leading up to the year-long credit crisis.

"This company's earnings power has been severely compromised," Ladenburg Thalmann analyst Richard Bove said in a note to clients. "Even though it now has exemplary management it could take years for the firm to recover."

Morgan Stanley analyst Patrick Pinschmidt expects additional writedowns of $3 billion and capital raise of about $4 billion at Merrill in the second half.

"Despite the scale of writedowns and capital raise, the firm has still not turned the corner on managing its risk overhang," Pinschmidt added.

Merrill recorded $9.4 billion of write-downs from exposure to CDOs, residential mortgages, bond insurers and other investments for the quarter. It has written down about $40 billion since the credit crisis began a year ago, leading to net losses exceeding $19.2 billion.

It has sold its 20 percent stake in Bloomberg LP back to the news and financial data company for $4.43 billion and plans to sell its Financial Data Services Inc unit for about $3.5 billion.

"The Bloomberg sale is unfortunate," Bernstein Research analyst Brad Hintz said. "Nevertheless, Bloomberg was not strategically important. We think the potential Financial Data Services Inc sale is fortuitous."

Goldman Sachs analyst William Tanona said, "Exposure to risky assets remains Merrill's largest challenge." He expects this to remain a problem for the next few quarters, barring a substantial improvement in the economy.

"We would prefer to see Merrill rid itself of these assets and clean up the balance sheet; however, this could bring about simultaneous capital needs that could be very costly for Merrill," Tanona added.

But Citigroup's Prashant Bhatia sounded positive on the company, noting the chances of a large dilutive common equity raise had declined due to asset sales. He expects the company to be profitable in the next two quarters.

Shares of Merrill, which have lost 43 percent of their value this year, were down 23 cents at $30.50 in morning trade on the New York Stock Exchange.

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