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Merrill Lynch Subprime Losses: A (dirty) Laundry List

It appears that no firm is suffering more than Merrill Lynch as the subprime investment disaster unfolds. The crisis has led to significant financial and legal problems for the firm. Here is a timeline:

October 5, 2007 — Merrill Lynch projects a third quarter net loss of up to 50 cents per share in connection with a $5.5 billion write-down. The firm attributes the write-down to “valuation adjustments” of its subprime CDOs and similar products.

Merrill stock subsequently declines by 5.8% and the firm's credit rating is downgraded.

Earlier that week, Merrill had fired its global head of fixed income, the co-head of fixed income for the Americas, and their boss, the former co-head of institutional securities.

October 19, 2007 — Wall Street Journal reports that MetroPCS Communications (“Metro”), a Dallas wireless-phone-service-provider, has filed suit against Merrill Lynch for fraud, negligence and breach of fiduciary duty. Metro's investment objective had been to invest its cash in low-risk, highly liquid assets — yet Merrill Lynch invested $133.9 million of its cash in high-risk, illiquid CDOs. The suit alleges that Merrill advised Metro the securities were “low risk and highly liquid.”

October 24 — Merrill Lynch states that the third quarter write-down is actually $7.9 billion, 43% higher than the $5.5 it projected just 19 days before. The Associated Press points out that Merrill's quarterly performance is by far the worst of the Wall Street firms.

October 25 — Merrill Lynch states that the write-down is now $8.4 billion, or 13.7% of its market capitalization, again citing its revaluing of subprime mortgage-backed bonds as a reason for the write-down. The Wall Street Journal, reports that Merrill has lost $2.24 billion for the quarter; Standard & Poors calls the write-down “staggering.“

There is evidence, however, that Merrill Lynch had substantial warnings of the impending subprime crisis. A Merrill Lynch analysis reported on December 5, 2006, found that losses on recent subprime deals could be 6% to 8% if home prices were flat in 2007, and in double digits if home prices fell by 5%. Their report further stated that falling home prices could trigger losses not only in riskier classes of mortgage-backed securities, but also in investment grade bonds.

Of course that's just the month of October, 2007. We'll keep you posted.

In the summer of 2007, our group, who individually and collectively have extensive experience in representing investors against Wall Street, formed an affiliation. Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage related investment losses. Contact us.


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