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Merrill to reveal new £2.4bn losses
Simon English, Evening Standard29 Oct 2007
Wall Street is bracing itself for a further $5 billion (£2.4 billion) of losses at Merrill Lynch as the beleaguered bank tries to steady itself in the wake of the ousting of chief executive Stan O'Neal.
The 56-year-old boss will formally resign today, but his fate was sealed last week after the board decided it had lost confidence in him. Merrill last week wrote off $8 billion in losses relating to the subprime mortgage crisis, a far worse result than expected.
Analysts have since downgraded the bank, and are anticipating greater write-downs. O'Neal conceded that the market value of its outstanding loans was moving so erratically he could not be sure there would be no more losses.
He pushed through the $1.3 billion purchase of subprime lender First Franklin last December, just as the mortgages crisis began to emerge.
Analysts say Merrill should use the occasion of O'Neal's departure to release as much bad news as possible. Peter Cohan, a Wall Street consultant and commentator, said: "By underestimating-credit losses by 58% a mere two weeks ago, O'Neal has demonstrated he's the wrong person to see Merrill through the retrenchment that will follow his risk-seeking strategies. And who knows whether there'll be more such unpleasant discoveries in future quarters?"
O'Neal will leave with a $154 million severance package and a tarnished reputation. The 11-strong board, nine of whom he selected during his five-year reign, met at the weekend to discuss a replacement. O'Neal fired scores of executives, leaving very few obvious internal candidates to replace him.
Although Merrill has been the worst-affected of the big banks because of his high-risk strategy, others are also likely to admit the subprime situation is worsening. Swiss banking giant UBS today moved to clarify its own position after reports it may face additional writedowns in trading positions related to home loans. It insists third-quarter pre-tax losses will be no more than the Swfr800 million (£335 million) already indicated. But it admits "further deterioration" in mortgage-related securities is possible in the fourth quarter.
"UBS is not assuming the quarter will continue as positively as it has begun, or the current difficulties will be resolved in the short term," the bank said. It reveals full numbers tomorrow.
Merrill will be hoping for a much-needed bounce in its share price when New York opens for business today, after a sticky few months that have seen its stock tumble from $95 to $66.
The extent to which O'Neal had alienated colleagues by undermining Merrill's culture became clear at the weekend. He openly sought to dismantle "Mother Merrill" - a reference to the bank's once-maternal attitude towards its staff.
Daniel Tully, who led the bank from 1992 to 1996, was one of his most outspoken critics. "I've been in touch with many, many of our fellow employees and ex-employees and they're sick. Everyone is sick about it," he said.
