By Tim McLaughlin
NEW YORK (Reuters) - Merrill Lynch & Co Inc reported about $16 billion in mortgage-related write-downs and adjustments on Thursday in the worst quarter of the company's history.
Shares of the world's largest brokerage fell more than 9 percent as investors worried about more write-downs and exposure to capital-strapped bond insurers.
The stock's 49 percent decline over the past year has slashed nearly $42 billion from Merrill's peak market capitalization of $84.7 billion in late January 2007.
The start of a booming year for investment banking fees and big bets on subprime mortgages ended in dismal fashion. Merrill's fourth-quarter net loss was $9.8 billion, or $12.01 a share, compared with year-earlier profit of $2.3 billion, or $2.41 a share.
"The loss seems higher than expected," said Peter Boockvar, an equity strategist at Miller Tabak & Co in New York. "The write-down, I guess, was large, about in line. But we knew that it was going to be bad."
The approximately $16 billion write-down, with credit adjustments, compares with analysts' expectations of $10 billion to $15 billion.
For 2007, Merrill lost about $8 billion on second-half write-downs and adjustments of about $24 billion. Lax risk management led to the ouster of Stan O'Neal as chief executive in late October.
CTW Investment Group, a union pension fund adviser, wrote a letter to Merrill board members that questions the role they played in overseeing top management.
"In particular, we question whether finance committee director John Finnegan's long personal and business relationship with former CEO Stanley O'Neal ... compromised his willingness to rein in Mr. O'Neal's aggressive risk and outsized compensation," CTW Executive Director William Patterson wrote.
Finnegan, who is chairman and CEO of Chubb Corp, worked with O'Neal during their days at General Motors Corp. He is chairman's of Merrill's compensation committee and also serves on the finance committee.
Recently named CEO John Thain said there are no current plans to make any changes on Merrill's board.
During a conference call, Thain said Merrill would ease risk-taking, but has enough capital to move forward after $12.8 billion in infusions from U.S. and foreign investors.
But Thain, who called the fourth-quarter results "unacceptable," said he could not promise that the company will avoid further write-downs on subprime mortgage-related positions.
There will be no dramatic job cuts, he said, and the company is not interested in selling its stakes in Bloomberg LP and asset manager BlackRock Inc .
The fourth-quarter loss included $11.5 billion in write-downs on U.S. collateralized debt obligations and subprime mortgage-related securities. Merrill also had to make a negative adjustment of $3.1 billion to reflect soured hedges with bond insurers.
In addition, Merrill took write-downs of $900 million on exposure to "Alt-A" loans, which are a slightly better credit risk than subprime, and on mortgages outside the United States. The company also wrote-down $356 million worth of exposure to leveraged loans and commercial real estate.
Lehman Brothers analyst Roger Freeman said he calculated $16.6 billion in charges had flowed through Merrill's income statement, plus another $1.3 billion through its investment securities portfolio, for a total of $17.9 billion. That amount, however, was partially offset by $1.3 billion in gains on structured debt.
Fourth-quarter results eclipsed the $2.3 billion loss in the third quarter, when Merrill recorded $8.4 billion in write-downs.
"I expected a large (loss) number, and it was," said Rose Grant, a portfolio manager at Eastern Investment Advisors in Boston.
"We were looking for a 'kitchen sink' quarter, where we can get these problems behind us and look at other areas of the business and see where the earnings are coming from," said Rose, whose firm has $2 billion under management. "We're about 80 percent there."
Overshadowed by Merrill's credit implosion were stellar results from the company's brokerage and investment banking operations.
Investment banking revenue climbed 22 percent to $4.9 billion in 2007. Meanwhile, the global wealth management division, which includes an army of brokers, produced net revenue of $14 billion, up 18 percent from the prior year.
The wealth management franchise attracted $30 billion in new money from clients in the fourth quarter. Total clients assets stood at $1.8 trillion at year's end.
Bank of America analyst Michael Hecht said that despite Merrill's stumbles, the company was still in position to keep its best employees and attract new talent.
Merrill shares were down $5.09 at $50 in afternoon New York Stock Exchange trade.
(Additional reporting by Ellis Mnyandu, Christian Plumb and Joseph Giannone in New York, editing by Mark Porter, Dave Zimmerman and Lisa Von Ahn)