Merrill Says 3Q Challenging

NEW YORK (AP) - Merrill Lynch & Co. said Friday it has adjusted the value of certain investments on its books in the third quarter, acknowledging difficulties as the debt markets remain in seizure.

The Wall Street bank said demand has weakened for a variety of products, especially investments that splice layers of mortgage risk. The bank also has commitments to finance corporate takeovers and other credit products dwindling in value.

The company said it filed a statement with the Securities and Exchange Commission because of its pending $1.8 billion deal to buy First Republic, a San Francisco bank that manages $34.1 billion in assets.

Under the terms of the deal, Merrill Lynch will pay $55 per First Republic share using half cash and half stock. How much Merrill Lynch stock constitutes the $55 will be determined by the average trading price of the company's stock during the next five days.

Sanford C. Bernstein analyst Brad Hintz said Merrill wanted to make sure First Republic's shareholders could not claim Merrill's stock traded at an artificially high price during this five-day period because the bank had not updated investors about how drastically the market has changed.

When Merrill Lynch reported its second-quarter results, the bank said the squeeze in these markets intensified at the beginning of the third quarter. In a filing with the Securities and Exchange Commission, Merrill said "conditions have continued to remain challenging."

With credit quality decaying, investors this summer embarked on a flight from risky investments.

Merrill Lynch did not quantify the exposures in question or any potential charges.

Hintz said the statement does not reflect anything new at the bank but is just Merrill Lynch playing it safe. He pointed out Merrill Lynch has been selling bonds lately without filing a statement like this.

"This is like putting on suspenders and a belt," he said. "This is a way of ensuring that the stock is priced correctly and there is no misunderstanding."

Shares of Merrill Lynch fell 60 cents to $74.54 in afternoon trading.