IMPEACH BUSH

NEW YORK (MarketWatch) - Ongoing write-downs for soured mortgage investments and other bad credit bets continued to plague Wall Street icon Merrill Lynch, leading to an almost $2 billion first-quarter loss and a planned 4,000 job cuts, the company reported Thursday.
But new Chief Executive John Thain said core businesses continued to operate well. "Despite this quarter's loss, Merrill Lynch's underlying businesses produced solid results in a difficult market environment," he said. "The firm's $82 billion excess liquidity pool has increased from year-end levels, and we remain well-capitalized."

Thain's comments are likely to calm some market jitters sparked by stubborn talk the firm may need to raise new capital. In recent weeks, Thain has repeatedly reassured investors that the firm will not need new capital.

"We do not have any plans to raise any additional new common equity," Thain said on a Thursday conference call.

But, the results are still, "a stark reminder that we are not out of the woods yet in terms of the credit crisis. There is more pain to come and pressures on earnings are going to continue," according to Octavio Marenzi, head of financial consultancy Celent.

Merrill shares edged up 21 cents to $45.10 during morning trading.

Thain also said that while the firm has tested a new credit facility established by the Federal Reserve to make credit available to investment banks against various kinds of collateral, it has not used the system to borrow a lot of money.

"We have tested it so that we can use it if we wanted to, but we have not actually used it to any significant amount," Thain said on a conference call after the firm reported first quarter results Thursday morning.

Merrill said it swung to a loss of $1.96 billion, or $2.19 a share, during the quarter, after earning $2.16 billion in the year-earlier period.

Thain characterized the three months ended in March as, "probably as difficult a quarter as I've seen in my 30 years on wall street.

The banking giant's loss of $2.20 a share from continuing operations compared to a $1.98 a share loss seen by analysts polled by FactSet Research.

The brokerage said revenue fell 69% to $2.9 billion, on a combined $4.5 billion in write-downs and valuation adjustments related to collateralized debt obligations, which are essentially funds consisting of different pools of mortgages, and a decline in value of hedges provided by bond insurers whose credit ratings are under threat.

It also detailed $2.3 billion worth of write-downs from leveraged finance and residential mortgage exposure, offset by a $2.1 billion benefit from a change in value on long-term liabilities.

Even excluding the write-downs and benefits, Merrill's revenue would have declined 26% to $7.4 billion.

Merrill also said it wrote down the value of it hedges on exposure to monoline insurance on certain credit positions to 40 cents on the dollar. "For these hedges our credit valuation adjustment was negative in the quarter largely driven by gains on hedges and a number of rating down grades for the lines we have exposure to," CFO Nelson Chai said on a conference call from investors after the company reported first-quarter earnings.

Chai said the company remains confident in the value of other hedges it has on collateralized debt obligations with other parties.

But the brokerage did report record revenue in global wealth management and in its rates and currencies division and said it was "well capitalized" with an $82 billion excess liquidity pool.

It also said it won't raise any capital by booking gains on its stake in asset manager BlackRock, or change the value it carries on its books for the investment.

On a conference call with analysts after their first quarter earnings report, CEO John Thain and CFO Nelson Chai said they will continue to carry the investment at a an $8 billion value, while its market value is actually about $5 billion greater, or $13 billion.

When asked why Merrill didn't want to monetize any of the position, Thain explained that, "There's a great relationship between our two companies and the ability for them to create products that we then distribute through our system is working very well. And so we really wouldn't want to disturb that relationship. And, you know, frankly the earnings that are being generated from BlackRock are very positive for us."

Merrill said it is planning to cut its workforce from year-end levels by about 4,000 employees, or 10% of its workforce excluding financial advisers and investment associates. The job cuts will be targeted at global markets, investment banking and support areas.

Cost savings from this reduction are expected to be about $800 million on an annualized basis, including approximately $600 million for the remainder of 2008. As a result, the firm expects to record a restructuring charge of approximately $350 million in the second quarter. End of Story

Greg Morcroft is MarketWatch's financial editor in New York.
Steve Goldstein is MarketWatch's London bureau chief.