Merrill Lynch could take a $1 billion subprime hit, say analystsnews
25 August 2007

Mumbai: US brokerage heavyweight Merrill Lynch & Co. Inc could take a big hit in its profits if it writes down over $1 billion in subprime lender assets it bought just eight months ago.

Merrill Lynch is expected to write down at least part of the goodwill-related assets from its $1.3 billion purchase of First Franklin Financial Corp, the No. 5 US subprime originator in the first quarter, reports quoted analysts as saying.

The subprime mortgage meltdown has already caused two Bear Stearns & Co hedge funds to collapse and Lehman Brothers to close a unit.

A hit to Merrill''s goodwill related to subprime loans may not be the only one among Wall Street firms, analysts said. Morgan Stanley, which last year paid $706 million for subprime lender Saxon Mortgage, also could face a write-down, though not on a similar scale, they said.

Since goodwill represents a premium over the value of a target company''s tangible assets, a write-down indicates a company overpaid for the acquisition.

Although detailed information about Merrill''s acquisition of First Franklin''s loans were not available, reports recently filed with US banking regulators show that Merrill Lynch Bank & Trust Co., where much of the First Franklin franchise is kept, lost $111 million through the first half of 2007.

Merrill Lynch put $999 million worth of goodwill on its balance sheet, primarily from the First Franklin acquisition, the company''s financial statements show.

Earlier this month, Merrill Lynch said it would sell life insurance businesses to Dutch insurer Aegon NV for $1.3 billion, which happens to be the same amount it paid for First Franklin.

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Merrill Lynch could take a $1 billion subprime hit, say analysts