Merrill Lynch reported third quarter earnings on October 24, and the news was not good. The company lost $2.3 billion in the third quarter, or $2.85 per diluted share. Problems in the CDO and U.S. subprime markets caused the firm to report a much larger than expected write-down of $7.9 billion in Merrill’s fixed income, currencies, and commodities business, and although the company had “record net revenues” in investment banking, and made money in its equity markets and global wealth management divisions, those positive revenues were not enough to offset the loss on its fixed-income exposures.

“Third-quarter 2007 total net revenues of $577 million decreased 94% from $9.8 billion in the prior-year period and were down 94% from $9.7 billion in the second quarter of 2007. Merrill Lynch’s third-quarter 2007 pretax net loss was $3.5 billion,” the company states in its earnings announcement.

The company took the somewhat unusual step of outlining its quarter-end exposure to asset-backed, CDO, and U.S subprime mortgage securities. On “Total ABS CDO-related exposures,” of $15.2 billion, as of September 28, the company took a $6.9 billion write-down, and of “Total U.S. subprime mortgage-related exposures” of $5.7 billion, the company took a $1.0 billion write-down.

Commenting on the firm’s earnings for the quarter, Merrill Lynch Chairman and CEO Stan O’Neal explained, in the announcement, the rationale for the write-downs: “In light of difficult credit markets and additional analysis by management during our quarter-end closing process, we re-examined our remaining CDO positions with more conservative assumptions. The result is a larger write-down of these assets than initially anticipated,” adding, “We expect market conditions for subprime mortgage-related assets to continue to be uncertain and we are working to resolve the remaining impact from our positions.”

For the entire Merrill Lynch earnings announcement please go here.