Merrill's Problems Make Even Citi Look Good

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Includes: C, MER
by: Todd Sullivan

Merrill Lynch (MER) on Wednesday morning actually may have done the impossible - make Citigroup (NYSE:C) shareholders sit back and say "at least we are not them".

Merrill had warned in early October that it would post a net loss of up to $.50 a share because of writing down $4.5 billion in collateralized debt obligations and subprime mortgages. Merrill on Wednesday reported a net loss of $2.24 billion, or $2.82 a share, compared with net income of $3.05 billion, or a $3.17 share last year. The actual amount of write downs? $7.9 billion.

Okay, here is the deal. When you come out and pre-announce, you are then required to come in very close to this number. A few hundred million would have been acceptable, but to almost double to estimate and be off by a almost $4 billion? Heads will roll.

CEO Stan O'Neal said the company reviewed its remaining CDO positions "with more conservative assumptions," resulting in the write down amount almost doubling.

He continued:

We expect market conditions for subprime mortgage-related assets to continue to be uncertain and we are working to resolve the remaining impact from our positions. Away from the mortgage-related areas, we continue to believe that secular trends in the global economy are favorable and that our businesses can perform well, as they have all year.

In July, O'Neal claimed in a letter to employees that the company's risk control procedures were "under control".

I never thought that I would say this, but as a Citigroup shareholder I am really glad we have Chuck Prince and not Stan O'Neal as our CEO. That is how bad things are are Merrill.