Merrill Lynch Loss, Layoffs

123jump.com Staff
17 Apr, 2008
New York City

Merrill Lynch continues to suffer from lack of appropriate risk control, lethargic management structure and falling market values of securities for which it has no insurers. Merrill Lynch reported first quarter revenue decline of 69% to $2.94 billion and net loss of $2.14 billion. Loss per share in the quarter was $2.19 compared to net income of $2.50. Merrill still suffers from high asset leverage and elevated compensation costs. Merrill wrote down $9 billion of assets.

[R]9:20AM New York – Merrill reports large loss related subprime and leveraged loans despite denying this for months in the media.[/R]

Merrill Lynch continues to suffer from lack of appropriate risk control, lethargic management structure and falling market values of securities for which it has no insurers.

Merrill Lynch reported first quarter revenue for the quarter ended on March 28, decline of 69% to $2.94 billion from $9.6 billion from a year ago. The sharp loss in revenue resulted on losses in principal transactions of $2.4 billion compared to a profit of $2.7 billion a year ago.

Earnings in the quarter fell to $2.14 billion or $2.19 per share compared to net income of $2.11 billion or $2.50 per share.

Only a day after the company released its fourth quarter earnings on January 18, 2008, chief executive John Thain on the Nightly Business Report news show on the PBS channel said that ‘Merrill does not have a significant’ exposure to subprime loans and does not expect any more charges from the asset based securities.

However, today Merrill reported one of the largest losses and asset write downs in the industry totaling nearly $9 billion. The company may have to seek more capital after denying for months that it may need more capital.

Despite a sharp drop in revenue of 69% compensation at the firm fell 14% only to $4.2 billion from a year ago and total non-compensation increased 10% from a year ago to $2 billion.

Rising losses and exposure to mortgage loans

At the end of the first quarter of 2008, net exposures to U.S. ABS CDOs were $6.7 billion, up from $5.1 billion at the end of 2007 as a reduction of hedges more than offset $1.5 billion of net write-downs. During the first quarter of 2008, credit valuation adjustments related to the firm’s hedges with financial guarantors were negative $3.0 billion, including negative $2.2 billion related to U.S. super senior ABS CDOs.

Net exposures related to U.S. sub-prime residential mortgages declined during the first quarter of 2008 to $1.4 billion, primarily due to additional hedging, asset sales and net write-downs of $306 million during the quarter. Net exposures related to Alt-A residential mortgages increased to $3.2 billion, primarily due to asset purchases that were partially offset by $402 million of net write-downs during the quarter. Net exposures related to prime residential mortgages increased to $30.8 billion, due to new originations.

Within the investment securities portfolio of Merrill Lynch’s U.S. banks, net pre-tax write-downs of $3.1 billion were recognized through other comprehensive loss OCI and $421 million through the income statement during the first quarter of 2008. At quarter end, the pre-tax OCI balance related to this portfolio was approximately negative $5.4 billion. This quarter’s write-downs were primarily related to Alt-A residential mortgage-backed securities.

At the end of the 2008 first quarter, leveraged finance commitments were approximately $14 billion, down from approximately $18 billion at the end of 2007. Net write-downs related to these exposures were approximately $925 million during the first quarter of 2008.

At quarter end, net exposures related to commercial real estate totaled approximately $21 billion, down from the end of 2007, as a number of asset sales during the quarter were partially offset by new originations from First Republic and foreign currency translations. These amounts exclude $4 billion of net exposures sold to GE Capital during the quarter. Net gains related to the firm’s commercial real estate net exposures, excluding ML Capital, were $53 million during the first quarter of 2008.

Equity Markets net revenues declined 21% from the prior-year quarter to $1.9 billion, as increases from most client-related businesses were more than offset by declines from the principal-related businesses.

Revenues in financial services and investment banking declines

Net revenues for financing and services and cash equity trading increased from a year ago, while equity-linked trading was down from the first quarter of 2007. The private equity business recorded negative net revenues of $207 million, down approximately $650 million from the prior-year quarter, and net revenues from the strategic risk group and hedge fund investments declined approximately $450 million year-over-year.

Investment banking net revenues were $805 million, down 40% from the strong performance in the 2007 first quarter, reflecting lower net revenues in debt and equity origination, as deal volumes for leveraged finance and initial public offerings significantly decreased

Global wealth management first quarter 2008 net revenues were a record at $3.6 billion, up 8% from the first quarter of 2007. Wealth management first quarter 2008 pre-tax earnings of $720 million were down 8% from a year ago, as the firm reserved for an $80 million client receivable. The pre-tax profit margin was 20%, down from 23.5% in the prior-year period.

Merrill plans to reduce staffing level

Merrill Lynch’s full-time employees totaled 63,100 at the end of the first quarter of 2008, a net decrease of 1,100 during the quarter, primarily related to the discontinuation of mortgage origination at First Franklin and the sale of ML Capital.

The firm intends to reduce its headcount from year-end levels by approximately 4,000 employees, or 10% excluding financial and investment associates.

Cost savings from this reduction are expected to be approximately $800 million on an annualized basis, including approximately $600 million for the remainder of 2008. As a result, the firm expects to record a restructuring charge of approximately $350 million in the 2008 second quarter.

Merrill may be forced to raise more capital

Merrill said that it has liquidity of $82 billion after recent issuance of stock sale and convertible preferred stock.

Merrill issued 36.7 million shares of common stock for $1.8 billion in January 2008 as well as an additional 12.5 million shares for $0.6 billion in February 2008 in connection with equity investments from Temasek Holdings, sovereign fund of Singapore.

In addition, Merrill issued 66,000 shares of 9% mandatory convertible preferred stock for an aggregate purchase price of $6.6 billion to investors including the Korea Investment Corporation, Kuwait Investment Authority and Mizuho Corporate Bank. These private placements reflect up to 126 million shares of common stock, if and when converted.

At the end of the first quarter, book value per share was $25.93, down from $29.34 at the end of 2007. Adjusting for the company’s $6.6 billion mandatory convertible preferred offering on a fully diluted basis, Merrill Lynch’s adjusted book value per share was $28.93 at the end of the first quarter of 2008.