Citing credit and mortgage problems, Merril Lynch (MER) said on Friday it would suffer a third quarter loss, having to write down close to $5 billion as a result of the credit problems over the summer.
The large portion of the writedowns come from the loss in value of subprime mortgages and collaterlized debt obligations, which came to around $4.5 million. The other $463 million comes from loans they promised to private-equity firms for corporate buyouts.
This could cause some long-term problems for Merril Lynch, as it gives the impression they aren't able to manage risk. In investment banking that's a critical skill to have.
The writedown is unexpectedly high, with total writedown for the larger financial companies across the world numbering $20 billion. Accounting for 25 percent of total writedown for the largest financial institutions in the world is going to hurt the reputation of the company.
In a research note, Wachovia Capital Markets LLC analyst Douglas Sipkin wrote, "We believe that the magnitude of (Merrill Lynch's) losses might dampen the firm's reputation around acquisitions."
Analysts expected earnings to reach $1.24 a share for Merrill Lynch, but the company says it expects losses of 50 cents a share for the quarter ending September 30.
With both Standard & Poor's and Moody's Investors service placing a negative outlook on the company, it may result in a downgrade in ratings in the near future.
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