Merrill forced to cut value of some assets

Merrill Lynch on Friday said tough credit market conditions in the third quarter had forced the investment bank to cut the valuation of certain assets on its balance sheet.

The disclosure, in a regulatory filing with the Securities and Exchange Commission, served as another warning that investment banks may disclose significant markdowns on assets such as mortgage-backed securities, leveraged loan commitments and collateralised debt obligations in their third-quarter earnings.

Lehman Brothers, Morgan Stanley, Bear Stearns and Goldman Sachs all report next week. Merrill reports in October.

Shares in Merrill were down about 1 per cent in midday New York trading at $74.43 after the disclosure.

Merrill said that it had made the statement, which did not offer any specifics about markdowns, in anticipation of the closing of its $1.8bn cash-and-stock acquisition of First Republic, the California-based private bank, on September 21.

The filing restated comments Merrill made in its most recent quarterly report that wider credit spreads, reduced liquidity, less price transparency and other factors presented "significant risk" to some of its holdings.

Merrill and other investment banks have seen their shares plunge this year in the wake of the credit squeeze, which has brought leveraged buy-out activity to a standstill, decreased revenue from securitisation and cut into the value of asset-backed securities, especially tied to risky mortgage loans.

Merrill shares have fallen about a quarter since hitting $97.53 in January. Investors are expected to closely scrutinise third-quarter earnings reports for more precise disclosure of the value of assets held by the banks. They will be looking especially at so-called "level three" assets that are thinly traded and hard to value. Investment banks are allowed their own valuations for these assets.

Merrill has less exposure to these assets than other investment banks. According to Bank of America figures, Merrill's level three assets are about 7 per cent of all its financial instruments.
(Financial Times)