Merrill Declines on Concern New Writedown May Reach $10 Billion

By Yalman Onaran


Nov. 2 (Bloomberg) -- Merrill Lynch & Co. fell the most in more than six years, leading financial stocks lower for a second day, after Deutsche Bank AG said the world's biggest brokerage may write down another $10 billion for losses on subprime assets.

Merrill declined $5.84, or 9.4 percent, to $56.35 at 10:56 a.m. in New York Stock Exchange composite trading, extending this year's drop to 40 percent. The fall was the biggest since the market reopened after the Sept. 11, 2001, terrorist attacks. Other investment banks also slid, dragging the AMEX Securities Broker/Dealer Index 3 percent lower.

Deutsche Bank analyst Michael Mayo cut his recommendation on Merrill shares to hold from buy, saying subprime losses may be bigger than the $8.4 billion Merrill announced last week. The disclosure led to the ouster of Chief Executive Officer Stan O'Neal. The U.S. Securities and Exchange Commission opened an informal inquiry into Merrill's reporting of potential losses, a person familiar with the investigation said yesterday.

``We have increasingly lost confidence in the financials of Merrill,'' Mayo said in a report today. ``If there are much higher CDO writedowns, Merrill may have additional credit rating downgrades.''

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, in a sign investors' confidence in the firm's creditworthiness is deteriorating.

Merrill engaged in deals with some hedge funds that may have been designed to postpone disclosure of losses on bonds and derivatives backed by subprime mortgages, the Wall Street Journal said today, citing unidentified people.

CDO Concern

The deals involved guarantees by Merrill to buy back debt it sold to those hedge funds, the report said. The Journal report increases concern that Merrill's holdings of collateralized debt obligations haven't been reduced as much as the company made outsiders believe, Mayo wrote.

SEC spokesman John Nester declined to comment today. Merrill spokeswoman Jessica Oppenheim didn't return calls seeking comment.

Merrill is a passive, minority investor in Bloomberg LP, the parent of Bloomberg News.