Merrill Lynch & Co.(MER), set to be acquired by Bank of America Corp. (BAC) in February, reported Thursday a third-quarter net loss of $5.2 billion, or $5.58 per share, compared to a net loss of $2.2 billion — $2.82 per share — from the year-ago quarter, as the company all but ditched remaining subprime and Alt-A holdings. The company’s exposure to U.S. Alt-A residential mortgages declined an astounding 98 percent from Q2 levels to just $25 million, and subprime mortgage-related exposures declined 71 percent to $295 million. The investment firm’s net exposures related to U.S. prime residential mortgages, however, increased 3 percent to $34.6 billion during the quarter, as First Republic Bank — owned by Merrill — continued to originate mortgages for its high-net-worth client base, and the investment bank held those loans in portfolio. Merrill’s wide third-quarter loss included $9.5 billion in write-downs, surprisingly less than the company’s July projection of $10.6 billion. The write-downs included $5.7 billion resulting from a July sale of troubled collateralized debt obligations at 22 cents on the dollar — less if you account for Merrill’s financing of its own deal — and another $3.8 billion from “severe market dislocations.” The company also recorded a gain $2.8 billion, thanks to an accounting quirk that allows companies to show gains when the value of their own debt falls over investor concerns. “The core businesses did relatively well in a very difficult environment,” Thain said in a conference call Thursday morning, as reported by MarketWatch. “September was particularly difficult for us,” he added. Thain said Merrill will continue to “reduce exposures and de-leverage the balance sheets prior to the closing of the Bank of America deal.” “As the landscape for financial services firms continues to change and our transition teams make good progress, we believe even more that the transaction will create an unparalleled global company with pre-eminent scale, earnings power and breadth,” he said. As of this week, Merrill is one of the nine U.S. financial firms set to receive a cash injection from the Treasury’s new plan to invest in the nation’s financial institutions in effort to replenish liquidity and inter-bank lending. BofA faces a tall order with Merrill, who will bring its troubles to the North Carolina-based bank when the acquisition is completed; BofA is already still attempting to properly digest its earlier acquistion of Countrywide Financial Corp., the nation’s largest lender and servicer. Shares in Merrill were at $18.25, up slightly, in late trading on the New York Stock Exchange. Editor’s note: To contact the reporter on this story, email [email protected]. Disclosure: The author held no relevant positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

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