Recession Watch: Merrill Lynch's $9.8 Billion Loss

The investment firm could face still more trouble with mortgages and commercial real estate.

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Merrill Lynch & Co. reported its biggest quarterly loss since it was founded 94 years ago.

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Investment titan Merrill Lynch received its much anticipated public flogging today, as the beleaguered financial sector chalked up another multibillion-dollar write-down tied to bad mortgage bets.

The firm posted a fourth-quarter loss of $9.8 billion, driven by a more than $16 billion write-down linked mainly to sophisticated debt vehicles, subprime mortgages, and bond insurers. The results represented a harrowing decline from the $2.3 billion profit Merrill turned during the same period of 2006, and they matched the staggering losses that Citigroup recorded Tuesday

By taking the giant write-downs now, Merrill Lynch's new CEO, John Thain, is hoping to put the company's mortgage-related headaches in the rearview mirror and begin steering the company back to profitability. "While the firm's earnings performance for the year is clearly unacceptable, over the last few weeks we have substantially strengthened the firm's liquidity and balance sheet," Thain said.

True, Merrill Lynch did recently receive much needed cash injections totaling just under $13 billion—mainly from investment funds in Singapore, South Korea, and Kuwait—but it is not out of the woods yet. Standard & Poor's equity analyst Matthew Albrecht says the company could face further mortgage and commercial real-estate write-downs in 2008—especially if the economy tips into recession.

Still, Albrecht says upcoming hits will not reach the magnitude of the current ones, and he expects the whopping losses to push Merrill out of the risky investments that led to the current mess. "They are going to restructure the way they do business," Albrecht says. "I expect a profit in 2008."

Here's hoping that Merrill Lynch—along with the rest of the banking giants that helped create the current mortgage chaos—will indeed take such lessons to heart.