Writedowns Overshadow Merrill 3Q Results

The Wall Street brokerage triggered a widespread sell-off of financial stocks on Wednesday when it said its mortgage investments lost $7.9 billion in value during the third quarter.

Less than three weeks ago, Merrill Lynch estimated these costs totaled $4.5 billion.

Merrill Lynch lost $2.3 billion in the third quarter, and its stock -- which before Wednesday had already lost a quarter of its value this year -- sank to a two-year low.

The panic over these costs overshadowed robust performance in Merrill Lynch's bread-and-butter investment banking business: helping companies issue stock, advising corporations on takeovers, trading contracts and managing investments for clients.

The mortgage debt exposure dominated Merrill Lynch's conference call Wednesday morning, but the company's management defended their franchise.

"Outside of mortgages, our execution has been consistent," Chief Executive Stan O'Neal said in the conference call. "We have a great organization, which despite this event remains a great organization.

We expect our other businesses to continue to perform well, as they have all year and as they did in this quarter."

During the third quarter, Merrill Lynch's revenue from trading and brokering stocks rose 4 percent to $1.58 billion, investment banking revenue jumped 23 percent to $1 billion, and wealth management revenue climbed 29 percent to $3.54 billion.

Though he cut his price target on Merrill's stock to $80 from $107, Deutsche Bank analyst Mike Mayo reiterated his "Buy" rating on the shares. He said Merrill is still "creating a franchise that is likely to gain value in the long term."

Mayo said he would like to see more information about the charges, but reminded investors that Merrill's fixed-income business represents just an eighth of the bank. Other analysts concurred.

"The firm's global businesses, excluding its fixed-income exposure, have shown resilience in the face of tough markets," Standard & Poor's analyst Matthew Albrecht wrote in a research note.