Merrill Lynch Suffers After $7.9 Billion Write Down

In a recent article from Market Watch:

"Merrill shares fell almost 8% to a near two-year low of $62.

'It turned out our assessment of the potential risk and mitigation strategies were inadequate,' O'Neal said. 'I am accountable for the mistakes as I am accountable for the performance of the firm overall and my job, our job, the leadership team's job is to address where we went wrong, what changes were necessary to make sure we respond to changes early, correctly and in every asset class at every stage of market's evolution,' O'Neal said.

Ratings agencies Fitch, Moody's and Standard & Poor's all downgraded the firm's credit ratings following the report.

The company reported a loss of $2.24 billion, or $2.82 a share, compared with a year-earlier profit of $3.05 billion, or $3.17 a share.

'These losses are relatively larger than those reported previously by other broker dealers and universal banks that have already reported,' DBRS analysts said in a report Wednesday. 'Merrill appears to have been much more exposed in its securitization businesses.' Merrill holds the leading position in CDO securitization."

Merrill Lynch had previously calculated their write down at approximately $4.5 billion of subprime and collateralized debt obligations (CDOs) on October 5th. Collateralized debt obligations are pools of loans, often times mortgages. Merrill Lynch's write down of $7.9 billion today clearly exceeded expectations. Given that the trading market for derivatives such as CDOs has come to a screeching halt since August of 2007, this quickly downgraded the company's credit ratings.

Since we don't expect to return to the easy financing market of prior years and our credit problems are far from over, it kind of makes you wonder how firms are calculating/estimating their mortgage write downs.