Merrill Lynch & Housing The Latest Credit Crunch Casualties
Wednesday, October 24, 2007SUSIE GHARIB: A roller coaster day on Wall Street, after bigger than expected losses from Merrill Lynch and the housing sector. The nation's largest brokerage firm surprised investors today with an $8 billion write-off related to the credit crisis. The credit crunch also caused sales of existing homes to drop another 8 percent in September. We have two reports tonight looking at the turmoil in housing and at Merrill Lynch. We begin with Suzanne Pratt in New York.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: Merrill Lynch is the latest casualty of the sub-prime mortgage market. But a nearly $8 billion write-down puts it in a league all its own. Not only is Merrill's write down bigger than that of its four rivals combined, but it is the only big investment firm to report a loss as a result of bad bets on risky sub- prime mortgages and related securities. At $2.85 a share, the third quarter loss was about six times more than the $0.45 loss than analysts were expecting. In a heated conference call with analysts today, Merrill Lynch CEO Stan O'Neal took the blame. STAN O'NEAL, CHMN & CEO, MERRILL LYNCH: The bottom line is we got it wrong by being overexposed to sub-prime.
PRATT: The $7.9 billion in write-downs is about $3 billion more than Merrill pre-announced earlier this month. Merrill attributed the change to additional analysis, which caused it to be more conservative in its assessment of the value of underlying securities. Standard & Poor's, which together with Moody's and Fitch downgraded Merrill's debt today, called Merrill's loss startling. S&P analyst Scott Sprinzen said he found Merrill's big recalculation of its write-downs most troubling.
SCOTT SPRINZEN, CREDIT ANALYST, STANDARD & POOR'S: What it suggests is that there are problems with the risk management capabilities of this company, their ability to monitor and value their exposures. And that's really a key competency for someone in their business.
PRATT: The S&P downgrade accelerated a decline in shares of Merrill and put additional pressure on other financial stocks. That's as investors grow more concerned that other firms will take additional write-downs in the fourth quarter. But most analysts consider Merrill's loss the result of heavy exposure to the sub-prime market and misjudgment of risk by management. Morningstar analyst Ryan Lentell says he does not think it suggests more trouble for others in the sector.
RYAN LENTELL, EQUITY ANALYST, MORNINGSTAR: If we take the environment we're in today, I think most of the banks are in pretty good shape, as they just reported large write-downs. And that would be our feeling going forward is that most of them already took the large write-downs and they don't have anything out there.
PRATT: Nevertheless, if the credit markets seize up again as they did this summer, experts say all bets are off. Then, we could see more big write-downs and more bad earnings from big financials. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: I'm Darren Gersh in Washington. Alarming, dark, bleak -- those were some of the uplifting words used to describe the housing outlook as builders met in Washington to debate how much further their industry has to fall. Economist Mark Zandi says today's report on home sales confirms the gloomy outlook.
MARK ZANDI, CHIEF ECONOMIST, MOODY'S ECONOMY.COM: It's a mess. The housing market is evaporating. This is about as bad as it could be and it looks like it is going to get worse before it gets better.
GERSH: The National Association of Realtors reports existing home sales for September fell 8 percent from a year earlier, the largest drop since 1999. The median home price tumbled 4.2 percent over the same period. Futures markets are signaling even more bad news, forecasting prices in the nation's top housing markets will fall 18 percent by the year 2010. UBS economist Maury Harris worries the downward momentum may freeze the market. MAURY HARRIS, CHIEF U.S. ECONOMIST, UBS: What happens if the lower prices just cause people to be afraid that they are going to go down any more, that you get deflationary psychology?
GERSH: The best that could be said today came from Daiwa economist Michael Moran, who argues the housing market may not be good, but it is not desperate. He says economic fundamentals are strong and troubled sub-prime loans account for only 3 percent of the mortgage market.
MICHAEL MORAN, CHIEF ECONOMIST, DAIWA SECURITIES AMERICA: Now, that's a big chunk. It's enough to influence the economy, but I don't think it's enough to derail the economy. I think it's a blow that the economy should be able to absorb.
GERSH: Even so, the nation hasn't seen housing stress like this in a quarter century. Zandi estimates the inventory of homes for sale is one million above normal. And, he adds, the nation's biggest banks hold $1.8 trillion in residential mortgage securities and other debt -- in all, a bit more than one-third of total assets. Zandi warns falling prices could touch off a deeper credit crunch.
ZANDI: It's less stark than it was four to eight weeks ago, but I would not be surprised if those embers that are still burning start on fire again.
GERSH: Sometime next year, the housing market is expected to begin to recover. But when it does, analysts believe builders will be doing 40 percent less business than they did during the boom years. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
