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Re: Todays economic news.
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11 Jan 2008, 07:36
By Bradley Keoun and Yalman Onaran
Jan. 11 (Bloomberg) -- Merrill Lynch & Co.'s fourth-quarter writedown, estimated by analysts to be at least $10 billion, would shrink shareholders' equity to less than 90 percent of Goldman Sachs Group Inc.'s.
Just two years ago, Merrill's shareholders' equity -- the firm's assets minus liabilities -- was on par with Goldman's, data compiled by Bloomberg show. Now, Merrill's weakened financial position compared with its more-profitable rival is forcing the world's largest brokerage to seek cash infusions from outside investors, slash bonuses and sell assets.
The fourth-quarter charges, the largest in the New York-based firm's 94-year history, would compound the $8.4 billion of writedowns from the prior quarter that led to a $2.2 billion net loss. John Thain, the former head of the New York Stock Exchange and co-president of Goldman, is faced with a capital shortage even as Goldman, the biggest U.S. securities firm, gets stronger.
``The firms continuously writing assets down keep seeing their borrowing costs increase,'' said Punk, Ziegel & Co. analyst Richard Bove. ``Those that aren't seeing the write-offs can borrow cheaper, which makes them more profitable. Going forward, the more profitable one will expand faster.''
Merrill's shareholder equity probably fell 2 percent in the fourth quarter to $37.8 billion, assuming a writedown of $10 billion for subprime home loans and mortgage-linked securities, Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York, estimated in a Jan. 10 report.
The figure includes last month's $6.2 billion investment from Singapore's Temasek Holdings Pte. and New York-based money manager Davis Selected Advisors LP.
O'Neal's Legacy
Thain told fixed-income managers last month to cut 2007 bonuses by an average of 40 percent, two people briefed on the matter said Dec. 17. Payments may fall by as much as 80 percent for traders who specialize in the mortgage bonds and collateralized debt obligations that posted the steepest losses, the people said.
Thain is seeking to repair the damage done by his predecessor, Stan O'Neal, who pushed the world's largest brokerage into home loans by buying subprime lender First Franklin Financial Corp. for $1.3 billion at the end of 2006 just before the mortgage market peaked. O'Neal was forced to step down in October, when the firm announced its third-quarter loss.
Merrill dropped almost 50 percent in New York trading during the past 12 months. The shares rose 47 cents, or 0.9 percent, to $52.50 at 9:55 a.m. in New York Stock Exchange composite trading.
Blankfein's Bonus
Merrill, whose market value was greater than Goldman's as recently as 2006, is now worth half as much. Goldman, based in New York, reported a 22 percent jump in earnings last year while profit tumbled at competitors like Morgan Stanley and Bear Stearns Cos. amid losses related to subprime mortgages.
Goldman Chief Lloyd Blankfein claimed a $67.9 million bonus, the biggest ever awarded to the CEO of a Wall Street firm, after delivering a record profit as investor aversion to mortgage-related securities prompted a contraction in global credit markets.
Merrill is a passive, minority owner of Bloomberg LP, the parent of Bloomberg News.
--Editor: Otis Bilodeau, Steve Dickson