On the same day that Merrill Lynch & Co. reported a 21% drop in first-quarter profits from a year ago, its chief financial officer Thomas Patrick warned investors of tough times ahead if the market does not improve.

Profits slid to $874 million, or 92 cents per diluted share, from the year-earlier period, when markets were still booming and Merrill posted earnings of $1.1 billion -- the financial services giant's best first quarter ever.

But a lot has changed since, and volatility in the capital markets has made retail investors skittish.

"The economic and market environments suggest" that private client investments "will continue to lag year-ago levels," Mr. Patrick told analysts on a conference call Wednesday. "If March levels persist, it will be difficult to sustain earning levels."

He said his company will continue to watch expenses, as it has done since the market began to slow.

Merrill has eliminated 1,700 positions this year, but Mr. Patrick did not say whether there will be more job cuts. Those already erased include 800 financial adviser positions, which thinned Merrill's broker ranks to 19,400. Merrill had 70,300 employees worldwide at the end of the quarter.

Mr. Patrick described some of the broker job cuts as performance-related. "If you have the kind of market we have now, people that are in this business and are having difficulty anyway are more likely to leave," he said.

Merrill also lopped off 700 positions by outsourcing jobs in its asset management unit and selling or closing some businesses in its private client group. And it laid off people in its research division.

During the first quarter, Merrill sold part of its Herzog Heine Geduld unit and its Global Energy Markets trading division. The sale of the latter unit contributed 0.5 cents to per-share earnings, Mr. Patrick said Wednesday.

Every unit is being asked to look closely at its margins and to cut spending in advertising and other areas, and Merrill is also reviewing its technology spending, he said.

Analysts said Merrill has been more thoughtful in its belt-tightening than some of its competitors.

"Merrill's staff reductions and cost-cutting initiative are part of a focused program. It's not about blindly laying people off," said Henry McVey, an equity analyst with Morgan Stanley Dean Witter in New York.

"And the Fed's easing obviously helps the environment for corporate earnings," Mr. McVey added, referring to Federal Reserve's surprise 50-basis-point interest rate cut of Wednesday morning.

Guy Moszkowski, an equity analyst with Citigroup's Salomon Smith Barney, said Merrill Lynch is "going to do things a little more intelligently by avoiding across-the-board cuts." But he added that the company " does have a heavy cost infrastructure."

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