Merrill Lynch is likely to take a new round of writedowns of between $3 billion and $5 billion, and post a possible loss, according to sources inside the firm.
The expected writedowns are likely to heighten the pressure on Merrill Lynch CEO John Thain and could threaten his credibility.
If Merrill needs to raise cash, Thain has only a few options in front of him, which include buying or merging with a bank, selling Merrill's stake in Bloomberg or BlackRock, or selling stock to raise capital.
Merrill cannot easily issue more common equity because investors who gave money to Merrill in December and January must receive substantial extra compensation if Merrill raises additional capital at too low a price.
If Merrill opts to sell off assets, it risks hurting future sources of revenue. Merrill owns a 20 percent stake in media and information company Bloomberg, which Thain valued at between $5 billion and $6 billion earlier this month.
Merrill shares were trading down 3.2 percent before the opening bell as concerns of more writedowns spread. Shares of Merrill closed at $33.05 Thursday on the New York Stock Exchange. Through Thursday, they have plunged 38 percent this year.
Not only are there concerns that Merrill will post further writedowns, but there was also talk that British bank Barclays may need to raise $18 billion more in capital.
Lehman Boosts Writedown Estimate
Earlier Friday, Lehman Brothers analyst Roger Freeman raised his estimate of second-quarter writedowns to $5.4 billion, citing its exposure to bond insurers. Freeman also saw higher quarterly losses at the world's largest brokerage.
Freeman's estimate the highest among Wall Street analysts. On average, analysts were expecting writedowns to range from $3.5 billion to $4.2 billion.
In addition to the bond insurer write-down, Freeman said he was now incorporating a larger CDO/subprime write-down following a sharp decline in the ABX index over the past few days. ABX, a synthetic index of home equity asset-backed securities tied to credit default swaps, is comprised of risky home loans.
Freeman widened his second-quarter loss estimate to $2.78 a share from 64 cents.
For 2008, he sees higher losses of $2.99 a share, from his prior view of a loss of 53 cents.
The analyst cut his price target to $44 from $47, and rates the stock "equal weight."
Barclays May Need More Cash
Separately, Citigroup analysts said they expect Barclays may need to raise a further 9 billion pounds ($18 billion) in capital, and take further writedowns as well as credit market conditions continue to deteriorate.
Citigroup also said Barclays was more likely to cut its dividend than raise it, despite assurances from the bank that it would keep paying dividends in cash and that its annual payout would be in line with last year's 34 pence per share.
Barclays, Britain's third largest bank, said on Wednesday it raised 4.5 billion pounds from investors including Qatar and Japan's Sumitomo Mitsui.
"We believe that it still leaves the company short of capital relative to peers," Citigroup said, adding that the bank will remain significantly undercapitalized even before any additional structured credit write-downs that may or may not be required.
Barclays Chief Executive John Varley had said about half the capital will be directed at higher (capital) ratios and about half will be directed at new business opportunities.
"While we think this is a legitimate long-term goal for Barclays, we are skeptical that it will provide meaningful growth opportunities in a group context in the short to medium term," Citigroup said.
It estimated that Barclays would need 6.6 billion pounds of additional equity to reach the same capital position as Royal Bank of Scotland and 8.6 billion pounds to meet the European banking sector average.
Barclays, which has lost more than $5 billion on assets hurt by the U.S. subprime crisis and credit crunch, said last week it planned to raise billions of pounds to rebuild its capital base.
Citigroup kept its "sell" rating on the stock and slashed its price target to 275 pence from 350 pence.
--Reuters and CNBC.com contributed to this report.