Merrill writedowns throw light on risk management

Merill Lynch third quarter profits warning leads to criticism of its risk management practices

NEW YORK – Merrill Lynch has released a warning on its third-quarter results. The bank said its mark-to-market losses on its collateralised debt obligation (CDO) and leveraged finance operations would be up to 50 cents a share.

The bank warned that it would make an estimated $4.5 billion of writedowns on its CDO and subprime mortgage holdings, citing an unprecedented move in credit spreads and a lack of market liquidity.

There will also be an estimated $967 million of gross losses on its leveraged finance operations, although the bank notes total exposure in this sector was reduced by 42% to $31 billion at the end of the third quarter, with the writedowns at $463 million net of related underwriting fees.

"The net losses related to these commitments were limited through aggressive and effective risk management," said Merrill Lynch.

The rating agencies, however, have taken a dim view of these developments - both Moody's and Standard and Poor's revised their outlooks on Merrill Lynch to negative.