Merrill said to face more writedowns

NEW YORK

Merrill Lynch & Co. could write down another $4 billion in value of complex financial instruments during the upcoming quarter if a new management team is installed, Deutsche Bank analyst Mike Mayo wrote in a research note Sunday night.

Merrill Lynch is already reeling after writing down $7.9 billion in value of collateralized debt obligations and subprime mortgage-backed securities. So-called CDOs combine slices of different kinds of debt into a new instrument.

Based on the widely expected firing of Merrill Lynch Chief Executive Stanley O'Neal, Mayo said a new chief executive would likely take a more conservative approach on valuing CDOs and reduce their value another $4 billion, resulting in a second straight quarter of operating losses.

Using the $4 billion writedown assumption, Mayo now forecasts Merrill Lynch will report a loss of 53 cents per share in the final quarter of 2007, after previously estimating the company would earn $2.08 per share. Analysts polled by Thomson Financial, on average, forecast earnings of $1.42 per share for the quarter.

Any new executive would face three tasks after taking over Merrill Lynch, Mayo said: "get the numbers right; gain credibility and trust with investors; and fix (the) lack of risk controls while not hurting the 7/8ths of the company that is performing well."

Shares of Merrill Lynch rose 13 cents to $66.22.