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Merrill Lynch posts $7.8bn loss Merrill Lynch posts $7.8bn loss
(about 5 hours later)
Wall Street banking giant Merrill Lynch has reported a loss for 2007 after getting caught up in problems stemming from a slump in the US housing market. Wall Street banking giant Merrill Lynch has unveiled a huge loss for 2007, crippled by exposure to risky investments in the US housing market.
The company said it had made a net loss of $7.8bn (£3.9bn) in the 12 months to the end of December. It made a net loss of $7.8bn (£3.9bn) in the 12 months to the end of December from a net profit of $7.5bn in 2006.
It is the latest US and European bank to reveal losses related to investments linked to the US mortgage market. The loss includes a massive $14.1bn write-down on failed investments related to sub-prime mortgages.
Included in those results is a massive $14.1bn write-down on investments related to sub-prime mortgages. Merrill Lynch is the latest big bank to reveal losses related to the crisis in the US mortgage market.
It is a shock to the system, they are trying to get as much transparency as possible about their sub-prime exposure Mark DurlingBrewin Dolphin Securities Earlier this week, Citigroup and JP Morgan also announced write-downs because of their exposure to the crisis in the sub-prime loan sector, which focused on consumers with poor or non-existent credit histories.
It is the company's second quarterly loss in a row. JP Morgan Chase said its earnings for the last three months of 2007 fell 34%, while Citigroup reported a $9.83bn net loss for the last three months of 2007.
'Unacceptable'
In the last three months of 2007 alone, Merrill chalked up losses of $9.83bn - the biggest quarterly loss in its history.
The previous chief executive, Stan O'Neal, stepped down in October because of the bank's poor performance.The previous chief executive, Stan O'Neal, stepped down in October because of the bank's poor performance.
New boss John Thain said: "While the firm's performance for the year is clearly unacceptable, over the last few weeks we have substantially strengthened the firm's liquidity and balance sheet." Having lost all that financial capital, the risk for Merrill is that its most valuable human capital - those execs untainted by sub-prime - will flee Robert PestonBBC Business Editor
New boss John Thain said while the firm's performance was "clearly unacceptable", Merrill had been able to strengthen its balance sheet over the last few weeks.
"I don't think you should anticipate any further problems of this magnitude," Mr Thain said.
"There would have to be something incredibly bad out there to have this happen again, and our whole goal is to get 2007 behind us."
Mr Thain is the former president of Goldman Sachs, one of the few Wall Street firms to have so far come through the sub-prime crisis largely unscathed.
Lifeline
BBC Business Editor Robert Peston said that Merrill has only survived thanks to lifesaving capital from the cash-rich economies of Asia and the Middle East.
MAIN SUB-PRIME LOSSES SO FAR Merrill Lynch: $22.1bnCitigroup: $18bn UBS: $13.5bn Morgan Stanley $9.4bn HSBC: $3.4bnBear Stearns: $3.2bn Deutsche Bank: $3.2bn Bank of America: $3bnBarclays: $2.6bn Royal Bank of Scotland: $2.6bn Freddie Mac: $2bnJP Morgan Chase: $3.2bn Credit Suisse: $1bn Wachovia: $1.1bn IKB: $2.6bn Paribas: $439mSource: Company reports Timeline: How the sub-prime crisis unfolded
Merrill Lynch said on Tuesday it had won fresh backing totalling $6.6bn from the Kuwait Investment Authority, the Korean Investment Corporation, a private Saudi Arabian fund and other investors.
Rivals Citigroup, UBS and Morgan Stanley have raised capital from similar sources.
The BBC's business editor said the damage to Merrill was not just financial.
"Having lost all that financial capital, the risk for Merrill is that its most valuable human capital - those executives untainted by sub-prime - will flee," he said.
Widespread woesWidespread woes
Earlier this week, Citigroup and JP Morgan also announced write-downs because of their exposure to the sub-prime loan sector.
JP Morgan Chase said its earnings for the last three months of 2007 fell 34%. Net income was $2.97bn (£1.5bn) in the quarter to the end of December, down from $4.53bn a year earlier.
MAIN SUB-PRIME LOSSES SO FAR Merrill Lynch: $22.1bnCitigroup: $18bn UBS: $13.5bn Morgan Stanley $9.4bn HSBC: $3.4bnBear Stearns: $3.2bn Deutsche Bank: $3.2bn Bank of America: $3bnBarclays: $2.6bn Royal Bank of Scotland: $2.6bn Freddie Mac: $2bnJP Morgan Chase: $1.3bn Credit Suisse: $1bn Wachovia: $1.1bn IKB: $2.6bn Paribas: $439mSource: Company reports Timeline: How the sub-prime crisis unfolded
On Tuesday, Citigroup reported a $9.83bn net loss for the last three months of 2007 after having to cut the value of its investments by $18.1bn.
Banks are struggling to calculate how much their investments in assets backed by sub-prime mortgages are actually worth, which is why they are reporting massive write-downs.Banks are struggling to calculate how much their investments in assets backed by sub-prime mortgages are actually worth, which is why they are reporting massive write-downs.
Analyst Mark Durling at Brewin Dolphin Securities said about Merrill Lynch's results: "It is a shock to the system, they are trying to get as much transparency as possible about their subprime exposure. "It is a shock to the system, they are trying to get as much transparency as possible about their subprime exposure," said Mark Durling at Brewin Dolphin Securities.
"They're being ultra-conservative here.""They're being ultra-conservative here."
The sub-prime market is focused on providing loans to those with limited or poor credit histories. During the US housing boom, the sub-prime market expanded significantly.
During the US housing boom, this market expanded significantly. But a series of interest rate rises over two years meant many sub-prime borrowers could no longer afford their monthly payments, causing them to default on loans. But a series of US interest rate rises over two years meant many sub-prime borrowers could no longer afford their monthly payments, causing them to default on loans.
Banks had packaged up these loans into financial instruments known as collateralised debt obligations and sold them on to investors.
Demand for CDOs dried up as the scale of defaults emerged, leaving banks nursing huge losses.
Merrill was among the largest creators of such securities.