Over recent weeks, the subprime crisis has hit Merrill Lynch hard, resulting in significant financial and legal problems for the firm. On October 5, 2007, the Wall Street Journal reported that Merrill Lynch projected a third quarter net loss of up to 50 cents per share in connection with a $5.5 billion write-down. This was followed by a 5.8% decline in the price of Merrill Lynch stock and a downgrade of its credit rating. The firm pointed to its “valuation adjustments” of subprime collateralized debt obligations (CDOs) and similar products as the reasons for the write-down. Earlier that week, Merrill terminated its global head of fixed income, the co-head of fixed income for the Americas, and their boss, the former co-head of institutional securities.
On October 24, Merrill Lynch stated that the third quarter write-down was $7.9 billion, 43% greater than the $5.5 it had reported just 19 days before. The Associated Press pointed out that Merrill suffered its first loss in six years, and its quarterly performance was the worst by far of the Wall Street firms.
One day later, on October 25, Merrill Lynch stated that the write-down was actually $8.4 billion, 13.7% of its market capitalization. Again, Merrill identified its revaluing of subprime mortgage-backed bonds as a reason for the write-down. According to the Wall Street Journal, Merrill lost $2.24 billion for the quarter, and Standard & Poors described the write-down as “staggering.”
Merrill Lynch’s legal problems have increased as well. On October 19, 2007, the Wall Street Journal reported that MetroPCS Communications (“Metro”), a Dallas wireless-phone-service-provider, filed suit against Merrill Lynch for fraud, negligence and breach of fiduciary duty in investing $133.9 million of its cash in high-risk, illiquid CDOs. Metro’s investment objective was to invest its cash in low-risk, highly liquid assets. Among other things, the suit alleges that Merrill improperly advised Metro that the securities were “low risk and highly liquid.”
These developments are somewhat surprising given that Merrill Lynch appears to have had substantial warnings of the impending subprime crisis. Indeed, on December 5, 2006, the Wall Street Journal reported that a Merrill Lynch analysis found that losses on recent subprime deals could be 6% to 8% if home prices were flat in 2007, and in double digits if home prices fell by 5%. Merrill’s analysis further found that falling home prices could trigger losses not only in riskier classes of mortgage-backed securities, but also in investment grade bonds, according to the article.
Page Perry is a nine lawyer Atlanta-based law firm with over 125 years collective experience representing investors in securities related litigation and arbitration. While past results are not necessarily indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry attorneys have successfully handled complex CMO, CDO and mortgage backed securities cases for over 20 years. The firm is currently involved in various subprime mortgage cases around the country.