Thain: Merrill Writedowns May Not Be Over

Writedowns related to bad subprime mortgage bets may not be over at Merrill Lynch, which reported the biggest loss in the company's history Thursday, recently appointed CEO John Thain told CNBC.

John Thain
John Thain

Merrill reported a quarterly net loss of nearly $10 billion, as its results were weighed down by $16 billion in mortgage-related writedowns and adjustments in the worst quarter of the company's history.

"No one can ever say that" more writedowns aren't possible, Thain said. "We're in a trading business. Trading businesses take risks. That's OK. It's just managing risk to the proper size and making sure we really understand it."

Thain had said in a conference call that the world's largest brokerage will ease risk taking, but that it has enough capital to move forward after $12.8 billion in infusions from U.S. and foreign investors.

He outlined to CNBC a number of measures the company will take to manage risk going forward, including weekly meetings for risk managers at the company.

Thain also said he doubted the company would see widespread layoffs, and he predicted the company's credit rating would be reaffirmed later today.

"Fundamentally this is a very strong franchise that has great earnings power," he said. We've raised the capital we need. We have problems in the CDO and subprime market behind us and I really think 2008 is going to be a great year."

Merrill reported a net loss of $9.83 billion in the fourth quarter, or $12.01 a share, down from earnings of $2.3 billion, or $2.41 a share in the year-ago period.

On an operating basis the company lost $12.57 a share, with analysts predicting a loss, on average, of $4.93 a share.

Actual damages included $11.5 billion in write-downs on U.S. collateralized debt obligations and subprime mortgage-related securities. The company also had to make a negative adjustment of $3.1 billion to reflect soured hedges with bond insurers.

In addition, Merrill took write-downs of $900 million on exposure to Alt-A loans, which are a slightly better credit risk than subprime mortgages, and on mortgages outside the United States. The company also wrote-down $356 million worth of exposure to leveraged loans and commercial real estate.

Analysts expected Merrill's writedown to land anywhere from $10 billion to $15 billion.

"If you look at the overall spectrum where people are marking things down, Merrill Lynch is at the more aggressive side, which in think is good news," Jeff Harte, managing director in equity research at Sandler O'Neill told "Squawk Box."

Outside of the markdowns, every other part of the business performed well, Harte said.

Merrill shares fell as investors worried about more writedowns and the company's exposure to capital-strapped bond insurers.

During a conference call, Thain touched on ways that he would seek to improve Merrill's risk-taking. He said he has hired a cohead of risk management and a senior executive to oversee all trading.

He also said the goal was to write-off as much as possible during this quarter.


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Earlier, in the company's earnings release, Thain called the company's results "clearly unacceptable."

During a review of Merrill's financial results on the call, the company briefly lost control of the call and it was interrupted by people swearing.

The company's earnings conference call will be followed by a town hall meeting where several Merrill executives are expected to question Thain about the company's situation and where responsibility for the crisis lies, CNBC has learned. Co-presidents Greg Fleming and Ahmass Fakahany will likely by scrutinized, as will former Chief Financial Officer Jeff Edwards.

Merrill confirmed that it has reduced its work force by about 1,000, and will likely cut jobs further. People familiar with the matter have told CNBC that Merrill will likely cut as many as 1,600 jobs.

Thain said he expects layoffs in the mortgage, structured credit, and fixed-income divisions.

He also expects to continue to sell some assets and otherwise redeploy capital to profitable businesses this year. Merrill recently sold parts of its middle-market consumer-lending business and an insurance unit.

However, Thain does not have any plans to sell its 50 percent stake in money-manager BlackRock , which is worth more than $1.3 billion, or its stake in Bloomberg.

Overshadowed by Merrill's credit implosion were stellar results from the company's brokerage and investment banking operations.

Investment banking revenue climbed 22 percent to $4.9 billion in 2007. Meanwhile, Merrill's global wealth management division, which includes its army of brokers, produced net revenue of $14 billion, up 18 percent from the prior year.

-- Reuters contributed to this report