Merrill Lynch suffered a loss of $8.6 billion “from continuing operations” for 2007, caused “by significant declines in Fixed Income, Currencies & Commodities (FICC) net revenues,” for the last two quarters of the year, the firm said in a January 17 announcement. Merrill Lynch wrote off a net $11.5 billion in the final quarter of 2007, on top of a third-quarter write down of $7.9 billion in U.S. subprime mortgages and asset backed securities (ABS) collateralized debt obligations (CDOs). These haircuts were part of the reason for the firm’s $14.9 billion pretax loss for continuing operations for the fourth quarter, and a net loss for the quarter of “$10.3 billion, or $12.57 per diluted share.”
“While the firm’s earnings performance for the year is clearly unacceptable, over the last few weeks we have substantially strengthened the firm’s liquidity and balance sheet,” Merrill Lynch’s new Chairman and CEO John Thain noted in the earnings release. The previous CEO and Chairman Stan O’Neal departed October 30, after the firm reported a third-quarter net loss of $3.2 billion from continuing operations, and the $7.9 billion write down from CDOs. Merrill has been selling assets to raise cash, notably the sale of Merrill Lynch Capital to GE Capital for an undisclosed amount, and a private placement of common stock with Temasek Holdings and Davis Selected Advisors, which raised $6.2 billion. Merrill said in its earnings announcement that at year-end it had $80 billion in excess liquidity.
But there’s still CDO exposure at Merrill. The company notes in an appendix to the announcement that its “total U.S. super senior ABS CDOs, long exposures (including associated gains and losses reported in income and other net changes in net exposures) were $46.1 billion and $30.4 billion [on] September 28, 2007 and December 28, 2007, respectively. Short exposure (including associated gains and losses reported in income and other net changes in net exposures) were $31.3 billion and $23.6 billion [on] September 28, 2007 and December 28, 2007. Short exposures primarily consist of purchases of credit default swap protection from various third parties, including monoline financial guarantors, insurers and other market participants.”
In addition, Merrill Lynch is beefing up its risk-management team. In a separate January 17 announcement, Merrill appointed a co-chief risk officer, Noel Donohoe, who will join Edmond Moriarty, the chief risk officer the company named in September.