Bank of America Reels from Unrest in Credit Market

Bank of America is slashing 3,000 people in its Global Corporate and Investment Banking unit and replacing the head of the division. The bank recently reported that its net income declined to $3.7 billion, or 82 cents per share, from $5.42 billion, or $1.18.

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STEVE INSKEEP, host:

And let's go next to Wall Street, which continues to feel the effects of the subprime mortgage crisis. The brokerage company Merrill Lynch said it had it's their first quarterly loss in six years. That's largely because of big losses in the mortgage business. At the same time, Bank of America said it was laying off 3,000 people after big losses last quarter.

NPR's Jim Zarroli has been following this story, and joins us now. Jim, good morning.

JIM ZARROLI: Good morning.

INSKEEP: How much trouble are these companies in?

ZARROLI: Well, you remember a few months ago, we were talking a lot about the subprime mortgage crisis. We're now sort of seeing the third quarter earnings reports coming in. So we're beginning to get a sense of exactly what that meant for banks and financial services companies, and they're hurting. All of the big Wall Street firms are hurting, just some of them are hurting more than others.

Bank of America's profits, for instance, were down 32 percent last quarter. They said that last week, and that was because of trading losses. Yesterday, the company said it was shaking up its global corporate and investment banking division. The head of the division is being replaced by somebody else. It announced 3,000 layoffs. That's about one and a half percent of its staff.

Merrill Lynch said yesterday that it had its first loss in six years last quarter. Wachovia and Citicorp have also said that their profits were down, again, because of trading losses in the subprime. So a lot of trouble out there in the Wall Street.

INSKEEP: Jim, I got to tell you, if you have some fly-by-night mortgage company that goes bust, you're not too surprised by that. But to have Merrill Lynch say we have to write down $5 billion worth of debt and then it turns out not to be enough and they have to add another $2 billion, that's surprising.

ZARROLI: Yeah. Well, you know, the mortgage securities business has been very profitable in recent years. All these firms sort of saw it as a great way to make money, and now they did that and now they're trying to sort of figure out what the damages are.

Merrill Lynch, as you say, used to be this company that made money by managing people's wealth and acting as a stockbroker. Stan O'Neal, the chief executive, has tried to take the firm into all of these new areas like collateralized debt obligations, mortgage-backed securities. And these are precisely the kinds of investments that have been really hurt by the calamity in subprime.

O'Neal basically said yesterday when he was talking to investors that the company had done a bad job of risk analysis, which, outside of Wall Street means, you know, they kind of got in over their heads.

INSKEEP: Mm. Jim, well, what about there's a way that this bad news is good in a sense, because I recall, over the summer, part of the great uncertainty, part of the reason there was a crisis is that nobody seemed to know how much money was being lost and how much risk was out there. Is it helpful to know now that Merrill Lynch has lost this much money, or Bank of America has lost this much money?

ZARROLI: It is helpful. The problem is that they still don't have a grip on exactly how much they lost in many cases. And that's a problem on Wall Street. Investors don't like surprises. As long as there are these uncertainties about how much people have lost out there, it's a problem.

When Wachovia, for instance, announced its profit decline earlier this month, it said the deal flow has slowed and investors are skittish in the face of liquidity challenges - which means, until it becomes clearer how deep these losses have been, there's going to be sort of a cloud hanging over Wall Street, and also over the economy as a whole because this affects the housing market.

INSKEEP: NPR's Jim Zarroli, thanks very much.

ZARROLI: You're welcome.

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