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Nye Lavalle
Merrill Loss May Be
Wider Than Projected
By RANDALL SMITH
October 24, 2007; Page A4
Merrill Lynch & Co. is expected to announce its third-quarter losses are more than $2 billion more than first projected, ratcheting up the pressure on Chief Executive Stan O'Neal to demonstrate he has a grip on the firm's risk level.

Merrill announced on Oct. 5 that it expected to write down $5 billion for the quarter that ended in September, the biggest such loss of any Wall Street firm, based mainly on an over-exposure to risky mortgage-related securities.

But the actual write-down is expected to come in far above that initial estimate, with outsiders putting the level at $7 billion or higher. The result will be pressure on Mr. O'Neal, who ousted two top bond executives three weeks ago when the extent of the losses became apparent, to make further changes.

Among those whose roles in the losses are likely to come under greater scrutiny will be Co-President Ahmass L. Fakahany, who backed the appointment in mid-2006 of the bond-management team that generated the losses, and Chief Financial Officer Jeff Edwards, who played a role in oversight of the valuation and risk levels of the firm's holdings.

Mr. O'Neal's own job could be in jeopardy depending on the actions he takes to reassure Merrill's board, which met over the past weekend, that his understanding and management of the firm's risk levels has improved. At the end of July, with a midsummer credit crunch under way, he sent a memo to reassure Merrill employees that the firm's risk level was under control.

In a video distributed to Merrill employees on Oct. 5, the day the loss was first estimated, Mr. O'Neal took pains to pinpoint the date that the credit crunch worsened as the day in early August when European central banks first stepped in to provide liquidity to the banking system, indicating how much conditions had deteriorated.

Among other executives in or near Merrill who could gain greater responsibility in a shake-up that may follow, Merrill alumni have speculated, is Laurence Fink, chief executive of BlackRock Inc., the bond-management firm in which Merrill acquired a roughly 50% stake in mid-2006.

Throughout his five-year tenure, Mr. O'Neal has been criticized for making such extensive cuts in Merrill's costs and former brain trust that the firm lost its institutional memory of how to manage its risks. Mr. O'Neal ousted one of the firm's top capital-markets executives, Arshad Zakaria, in 2003 after concluding that he was campaigning to become Merrill's president. And he approved the replacement of a group of senior capital-markets executives led by Jeffrey Kronthal with a younger, more risk-prone team led by 39-year-old Osman Semerci.

Mr. Semerci, who was ousted Oct. 3, oversaw the build-up of an outsize position, estimated at more than $25 billion, in risky assets known as collateralized debt obligations, which are securities backed by pools of assets such as mortgage securities, including the type of subprime mortgages to the least creditworthy borrowers that have plummeted in value this year as defaults have risen.

On Oct. 5, Merrill estimated it had taken a loss of $4.5 billion on such CDOs, in which it had been the No. 1 underwriter since 2004.

In a report to clients yesterday, analyst Brad Hintz of Sanford Bernstein & Co. estimated that a more cautious risk posture would cost the firm $1 billion in annual earnings starting next year.
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anon2

Only 94% ? What if there homes were taken from them as well?

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