LYNN NEARY, host:
On Wall Street, one of the country's biggest investment firms, Merrill Lynch, today announced net losses of nearly two billion dollars for the first quarter of the year. The losses are due to bad investments in the mortgage market and it comes on top of last year's record losses as a result of the housing market meltdown. Merrill's CEO, John Thain, is now trying to boost confidence amongst shareholders.
NPR's Jim Zarroli has this report.
JIM ZARROLI: When John Thain was brought in last year, Merrill Lynch was already neck deep in the subprime quicksand and sinking fast. The firm has been a major purveyor of risky securities, called collateralized debt obligations.
According to an analysis in yesterday's Wall Street Journal, those securities began to lose value in 2006. But instead of selling them, Merrill decided to double down on its investment, taking more of them onto its balance sheets.
Lawrence White is a professor of economics at New York University.
Professor LAWRENCE WHITE (Economics, New York University): You're losing money, so you go out and you make bigger bets hoping that you'll get salvation, that the bigger bet will pay off and cover the initial losses.
ZARROLI: The Journal said executives at the firm who objected to the excessive risks it was taking were sometimes demoted or forced out. White says it was an indefensible strategy.
Prof. WHITE: They, along with everybody else on Wall Street, have been singing the song of risk management for these past few years. It's clear it was purely a song and there was no substance underlying the song.
ZARROLI: Merrill kept taking on these securities, even after a major insurance company, AIG, said it would no longer underwrite them. Last fall, the ground finally fell out from underneath Merrill. It reported billions of dollars in write downs from bad investments, and its CEO Stan O'Neal was forced out of office. In the months since then, John Thain, the former head of the New York Stock Exchange, has been trying to restore Merrill's credibility in the financial world.
David Easthope is a senior analyst at the research firm Celent.
Mr. DAVID EASTHOPE (Senior Analyst, Celent): Certainly his first order of business was to get the financial situation righted, and certainly one of things to do was to make sure that they had the proper amount of capital and credit reserves.
ZARROLI: Like a lot of big Wall Street firms lately, Merrill reached out to overseas investors. It received big infusions of cash from investment authorities in Kuwait and Singapore. The money has shored up Merrill's balance sheet, and that's gone a long way toward easing investor fears about the firm's future.
Again, Lawrence White.
Prof. WHITE: They have managed to find more capital, get more investors to invest more money over the past three, four, five months. So at this point I don't think they are in danger of becoming insolvent, but clearly this is not a happy experience for the senior management at Merrill or for their shareholders.
ZARROLI: Now the company which lost money last year is having to take steps to cut expenses. David Easthope says one thing Merrill has gone for it right now is that it's had time to look at its books and is beginning to understand the size of its mortgage losses a bit better.
Mr. EASTHOPE: The scale level of the credit losses are fairly well understood now, even though the situation appears to be getting weaker before it gets better.
ZARROLI: And investors are clearly looking for signs that the subprime crisis is being contained on Wall Street. Yesterday, JP Morgan Chase issued a better than expected report on its first quarter earnings, and stock prices finished the day sharply higher.
Jim Zarroli, NPR News, New York.
NPR transcripts are created on a rush deadline by Verb8tm, Inc., an NPR contractor, and produced using a proprietary transcription process developed with NPR. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.