Credit Crunch Hits Profits at Two Giants

http://www.insidearm.com/news/00006958-credit-crunch-hits-profits-at-two-giants/

Washington Mutual and Merrill Lynch both said Friday that they expect profits to plummet for the third quarter on weakness in the consumer credit market, specifically in mortgages.

In a press release Friday, Seattle-based Washington Mutual, Inc. (NYSE: WM) warned investors that a weakening housing market and disruptions in the secondary mortgage market through the end of the third quarter will result in a decline in net income of approximately 75 percent from the prior year quarter. In the third quarter of 2006, WaMu reported earnings of $748 million, or 77 cents per share. Analysts had already anticipated earnings to drop up to 50 percent.

WaMu said that their loan loss provision will be approximately $975 million for the quarter, which exceeds net charge-offs for the quarter by approximately $550 million. The company pointed blame squarely at the deteriorating housing market, singling out subprime and home equity loans.

New York-based brokerage firm Merrill Lynch (NYSE: MER) went a bit further, saying that they expect a loss for the third quarter of 2007. The company expects to report a loss of 50 cents per share for the quarter, compared to the $2 per share in earnings it reported for Q3 2006. Merrill blamed writedowns of collateralized debt obligations and its position in leveraged debt vehicles backed by poor quality mortgages.

Merrill said that it will writedown some $4.5 billion of its holdings of collateralized debt obligations and subprime mortgages. It will also write off $967 million worth of leveraged lending commitments.

The two warnings came in the same week as a warning from Citibank over its upcoming Q3 results (“Citigroup Earnings to Fall 60% on Loan Problems,” 10/1). Citigroup, however, turned lemons into lemonade in its statement saying that the worst was behind it and Q4 should return to near-normal.

WaMu Chairman and CEO Kerry Killinger followed Citi’s lead, stating in the release, "While we’re disappointed with our anticipated third-quarter results, we look forward to an improved fourth quarter as we continue to see good operating performance in our Retail Banking, Card Services and Commercial Group businesses.”

Merrill Lynch was also cautiously optimistic on the fourth quarter. “While it is very early in the current quarter and despite continued challenges in structured finance, we are beginning to see signs of a return to more normal activity levels in a number of markets,” said CEO Stan O’Neal.

Credit Crunch Hits Profits at Two Giants

Patrick Lunsford

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