Merrill Falls on Concern Writedown May Be $10 Billion (Update1)
By Yalman Onaran
Nov. 2 (Bloomberg) -- Merrill Lynch & Co. fell the most in six years, leading financial stocks lower for a second day, after Deutsche Bank AG said the world's biggest brokerage may write down an additional $10 billion for losses on subprime assets.
``We have increasingly lost confidence in the financials of Merrill,'' Deutsche Bank analyst Michael Mayo said in a report today. ``Merrill may have additional credit rating downgrades'' should the New York-based firm be forced to write down the value of its debt holdings, Mayo said.
Merrill declined $5.32, or 8.6 percent, to $56.87 at 12:48 p.m. in New York Stock Exchange composite trading, extending this year's drop to 39 percent. The fall was the biggest since the Sept. 11, 2001, terrorist attacks.
Merrill Lynch unraveled in the past two weeks after reporting the biggest quarterly loss in its 93-year history, taking an $8.4 billion writedown that was almost double its own forecast. The disclosure forced Chief Executive Officer Stan O'Neal to step down on Oct. 30, and Merrill is searching for a replacement.
The share price decline, which earlier today was as steep as 13 percent, dragged other financial stocks lower as well. The Amex Securities Broker/Dealer Index fell 3 percent, extending yesterday's 4.9 percent plunge for the biggest two-day drop in more than five years.
`No Truth' to Rumors
Goldman Sachs Group Inc., the biggest securities firm by market value, fell 4.7 percent on speculation the New York-based company will announce additional writedowns of its own. Spokesman Lucas Van Praag said there was ``no truth in the rumors, some of which smack of rather poor attempts at market manipulation.''
The Securities and Exchange Commission has opened a probe into whether Merrill accurately disclosed what it knew about potential losses from subprime mortgages to investors, a person with direct knowledge of the case said Oct. 31.
Merrill shares rebounded from the day's lows after the company said in a statement it has ``no reason to believe'' it made trades designed to hide losses. Merrill spokeswoman Jessica Oppenheim declined to comment beyond the statement.
SEC spokesman John Nester also declined to comment.
The SEC will probably examine whether dealings with hedge funds complied with accounting rules or whether Merrill ``tried to engage in what looks like slight of hand,'' said Peter Henning, a former attorney in the criminal division of the U.S. Justice Department who teaches at Wayne University in Detroit. The deals may be legal, depending on how firm Merrill's obligation was to buy back assets or the likelihood that it would be forced to do so, he said.
Enron Analogy
The SEC's ``concern will go back to what happened at Enron,'' the Houston-based energy-trading company that collapsed in an accounting scandal in 2001, Henning said. ``Are they temporarily offloading assets or securities to dress up their balance sheet in the short term?''
Mayo lowered his recommendation on Merrill shares to hold from buy, citing the SEC inquiry, which was reported earlier by the Wall Street Journal.
``Our concern is on relying on a company's statement that has no CEO and is facing a potential SEC investigation and may have engaged in questionable private transactions,'' Mayo wrote in his note to investors.
In a further sign investors' confidence in the firm's creditworthiness is deteriorating, credit-default swaps tied to Merrill Lynch bonds climbed 30 basis points to 135 basis points, according to broker Phoenix Partners Group. They're trading at the highest level in more than five years, Credit Suisse Group said.
Merrill is a passive, minority investor in Bloomberg LP, the parent of Bloomberg News.
To contact the reporter on this story: Yalman Onaran in New York at yonaran@bloomberg.net .
Last Updated: November 2, 2007 12:53 EDT |
