Merrill Lynch & Co. Inc.'s top executive said it has raised the necessary capital to steady its balance sheet after a second consecutive quarter of massive losses from mortgage-related writedowns.
Over the past several weeks the New York company raised $12.8 billion of capital, including a $6.6 billion infusion announced this week to further strengthen its balance sheet after securing $6.2 billion of capital last month.
John A. Thain, Merrill's chairman and chief executive officer, said during a conference call Thursday that he is comfortable that now it is well capitalized.
"We have raised significantly greater capital than our losses," he said. "We have replaced the equity base and put ourselves in a position that we are well capitalized. I am very confident that we have the capital base that we need to go forward into 2008 and beyond."
Analysts said after scrambling to raise capital, it has raised enough. "Merrill has put itself in a position where it won't have further problems with its balance sheet," said Cubillas Ding, a senior analyst with the Boston financial research and consulting firm Celent LLC. "I think they are comfortable with their current situation."
Mr. Thain, who succeeded E. Stanley O'Neal after Merrill reported a third-quarter loss of $8.4 billion, said Merrill is focused on "balance sheet management" this year as it continues to "rationalize and redeploy" its equity. "We are actively working to bring down the size of the balance sheet," Mr. Thain said. "We are reducing illiquid assets," and this quarter "we'll be freeing up liquidity."
Merrill will add to its risk management team, he said, but it will not sell its stake in BlackRock Inc., the New York mutual fund company in which Merrill bought a 49.8% stake in 2006. "BlackRock is a core strategic component of our business, and it is not something we are looking to sell." (BlackRock said Wednesday that it had added Mr. Thain to its board.)
For the fourth quarter, Merrill posted a net loss of $9.91 billion, or $12.01 a share, along with $14.6 billion of writedowns related to subprime mortgages. It reported "negative revenue" of $8.19 billion. A year earlier it posted a profit of $2.3 billion, or $2.41 a share, on revenue of $8.39 billion. Thomson Financial's said analysts expected a loss of $4.70 a share.
"We actually expect that some investors may be disappointed that Merrill did not take a larger writedown, given more aggressive actions at some of its competitors and in the wake of such significant capital raises," Jeffrey Harte, an analyst at Sandler O'Neill & Partners LP, wrote in a note Thursday. "However, the underlying results across many of Merrill's businesses remain generally strong, which should at least partially offset the initial disappointment."
Mr. Thain said Merrill can expand internationally and in traditional retail brokerage business.
Though U.S. economic growth will be slower this year, there are opportunities to expand in India, China, Latin America, Brazil, Russia, and the Pacific Rim, he said.
The retail brokerage business added $30 billion of assets in the quarter and is "relatively immune" to short-term market conditions, Mr. Thain said. "Our business strategy is a good one, and there are great long-term prospects" he said. "As we look into 2008, we are optimistic about our ability to perform for shareholders."
To improve its image with ratings agencies, Mr. Thain said, Merrill plans to develop its risk management by adding executives and by reinstituting a risk committee that will meet weekly. (Moody's Investors Service Inc. and Fitch Inc. affirmed their ratings Thursday for Merrill.)
"It is very important to emphasize to the organization the importance of risk management," he said.
On collateralized debt obligations, "we did not do a good job, and we want to begin a line of defense" to ensure something like this does not happen again.
Merrill will continue to take risks, because "we don't make money if we don't take risks, but the size of the risk should be appropriate to the business," Mr. Thain said. "We shouldn't take a risk that wipes out the entire earnings of that business or take a risk that can wipe out the earnings of the entire firm."
