Merrill Lynch Posts $7.5 Billion Loss

Merrill Lynch reported a third-quarter net loss of $7.5 billion on Thursday—worse than analysts had expected—on write-downs and credit losses on complex debt securities.

But shares of the brokerage house, which last month accepted a takeover bid from Bank of America, climbed 4 percent on confidence that the merger—which valued Merrill at $50 billion when it was announced last month—will still go through.

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"There's a lot of moving parts here but none of it is very surprising," said Tim Ghriskey, chief investment officer at Solaris Asset Management, which owns no shares in either Merrill or Bank of America .

Merrill posted more than $9 billion in write-downs and credit losses, most of which occurred in September. It cited the bankruptcy of Lehman Brothers and wide market volatility as driving the losses.

The bank said it would issue $10 billion of non-voting preferred stock and related warrants to the U.S. Treasury under the government program that gave Bank of America a $25 billion capital injection earlier this week.

In addition, because of the Bank of America deal, Merrill said it was no longer seeking to sell a controlling stake in its Financial Data Services subsidiary.

Merrill had said when it announced second-quarter results that it had signed a letter of intent to sell FDS, which provides administrative services to the company's mutual funds and retail banking businesses.

The bank did receive a pretax gain of $4.3 billion from the sale of its 20 percent stake in Bloomberg, the media and data company, which had also been announced with its second-quarter results.

Struggling to Survive

Merrill, like former peers Lehman Brothers and Bear Stearns, has struggled to survive the credit crisis, which has crippled its large mortgage and complex debt businesses.

In July, Merrill sold a $30.6 billion portfolio of structured debt securities to private equity firm Lone Star Funds, taking a $5.7 billion write-down and raising capital in the process—but this was not enough to solve its problems.

The company's share price continued to fall, and Chief Executive John Thain engineered the speedy sale to Bank of America on the same weekend that Lehman Brothers was forced into bankruptcy.

There had been doubts about the deal going through, and the difference between Merrill's share price and the price implied by the deal was initially wide. But the difference has been narrowing in recent weeks.

Merrill shares were at $19.00—about 10 percent below the price implied by the deal—in early trading on the New York Stock Exchange. The shares had been as much as 35 percent below the deal price.

"Certainly, this acquisition should be a concern to Bank of America shareholders, but we believe that Bank of America is acquiring these assets at a bargain-basement price," said Ghriskey.

On a conference call with analysts Thursday morning, Thain said he expected the shareholder vote on the deal to be held in mid- to late November.

Merrill said its third-quarter net loss applicable to common shareholders widened to $5.58 per share from $2.82 per share, or $2.3 billion, a year earlier.

The company posted a loss of $5.56 per share from continuing operations. Analysts' average forecast was a loss of $5.18 per share, according to Reuters Estimates.

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