Merrill Lynch takes $7.9B loan hit

(CNN) -- Merrill Lynch & Co. Inc. took a $7.9 billion writedown in the third quarter due to bad mortgage bets, well exceeding its initial estimates and raising questions about the bank's future leadership.

The Wall Street firm said Wednesday heavy losses on home loans given to borrowers with poor credit, and collateralized debt obligations -- pools of bonds sold off in slices of varying credit risk -- hurt performance and resulted in the company's quarterly net loss.

The mortgage hit is well above the $5 billion writedown Merrill estimated it would take earlier this month. The blow is likely to renew credit fears and turn up the heat on Merrill Lynch chief executive Stanley O'Neal.

As a result of the mortgage-related losses, the bank posted a net loss from continuing operations of $2.3 billion, or $2.85 a share, for the quarter ended in September. In the year-ago period, Merrill Lynch reported a net profit of $3 billion, or $3.47 a share, on the same basis.

Net revenue dwindled to $577 million, down 94 percent from $9.8 billion in the same period last year. Shares of Merrill Lynch fell nearly 3 percent in pre-market trading.

Merrill Lynch said it decided to re-examine its CDO positions "with more conservative assumptions" due to difficult credit markets. As a result, it took a larger-than-expected writedown.

"We expect market conditions for sub-prime mortgage-related assets to continue to be uncertain and we are working to resolve the remaining impact from our positions," O'Neal said in a statement.

On Oct. 5, Merrill Lynch warned investors and analysts that it would take a $5 billion third-quarter writedown, including a $463 million writedown related to loans extended for corporate buyouts.

Merrill Lynch's writedown is the biggest of all the Wall Street firms, far exceeding the $3 billion hit Citicorp. Inc. suffered from exposure to mortgage-backed securities. Financial services companies worldwide have reported more than $20 billion in losses related to the mortgage meltdown.

Fears about rising defaults on risky home loans have scared investors away from mortgage-backed securities, resulting in a decline in their values. A group of banks has announced plans to launch a "superfund" to revive the market, although doubts are growing about whether the fund will be able to get off the ground. E-mail to a friend