Merrill Trims CDOs and Staff, as It Boosts Global FAs to 16,690

"We told you at the end of the first quarter that we were going to focus on expenses, and that we were going to reduce our headcount by 10 percent of our non-financial advisor headcount, that is about 4,000 people. We delivered on that promise," Thain says. "We have actually reduced our headcount by 4,200 people."

Financial analysts like Richard Bove of Ladenburg Thalman are not terribly impressed. "This is the fourth quarter in a row that the company has reported a loss. The total amount lost in this timeframe has been $19.2 billion," he explains.

"Even though it now has exemplary management, it could take years for the firm to recover," Bove says.

After releasing its second-quarter results in mid-July, Merrill announced a series of steps to reduce its risk exposures and to further strengthen its capital position, such as: o A substantial sale of U.S. super-senior ABS CDO securities, resulting in an exposure reduction of $11.1 billion; o An agreement to terminate ABS CDO hedges with monoline guarantor XL Capital Assurance Inc. and settlement negotiations with other monoline counterparties;o Plans to issue new common shares with gross proceeds of approximately $8.5 billion through a public offering (held July 29);o Agreement that Temasek Holdings of Singapore will purchase $3.4 billion of common stock, subject to regulatory approvals; and o Purchase of about 750,000 shares of common stock by executives.

As a result of these steps, the company says it should record a pre-tax write-down in the third quarter of roughly $5.7 billion. In the third quarter, Merrill Lynch also expects to record an expense of $2.5 billion related to its reset payment to Temasek and $2.4 billion of additional dividends.

At the end of July, Massachusetts securities regulators accused the firm of fraud for allegedly promoting the sale of auction-rate securities when the firm knew the investments were becoming increasingly unstable — a charge Merrill denies.

"We are disappointed that Massachusetts filed this action because it ignores the only reason our advisors sold auction rate securities: They believed they were good investments for clients willing to trade some liquidity for higher return," the company says in a statement.

"The inarguable fact is the number of auctions that had failed in nearly two decades of (auction-rate securities) sales was small. In 2007, there were no failed auctions of securities sold to retail clients and, in fact, none to these clients until late January 2008."

But Massachusetts regulators claim that Merrill Lynch knew several months earlier "that auction markets were not functioning properly and were, in fact, in significant danger of collapsing."

The complaint cites a personal e-mail written by a Merrill Lynch executive on Nov. 19, 2007. "Market is collapsing. No more $2k dinners at CRU," said the e-mail, referring to a trendy Manhattan restaurant.

"We want Merrill Lynch to undo the damage they did by selling these things knowingly to people, telling them they had liquidity … then leaving them stranded when they knew these auction markets were in trouble."

The complaint will be heard by a hearings officer within the Commonwealth's Securities Division. Merrill Lynch can appeal any finding in court.

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Janet Levaux, MBA/MA, is the managing editor of Research; reach her at [email protected].