Friday, September 14, 2007

Merrill Lynch - Strategy 2007

1. NEW YORK--(BUSINESS WIRE)--Jan. 18, 2007--Merrill Lynch (NYSE:
MER) today reported record full year net revenues, net earnings and earnings per diluted share for 2006, driven by strong growth in the firm's business segments. Net earnings for 2006 were $7.5 billion, or $7.59 per diluted share, as total net revenues increased strongly to $34.7 billion. Pre-tax earnings increased to a record $10.4 billion, the pre-tax profit margin rose to a record 30.1%, and the return on average common equity increased to 21.3%. Book value per common share was $41.37, up 15% from 2005. Merrill Lynch's 2006 results included the one-time net gain arising from the closing of the merger between Merrill Lynch Investment Managers (MLIM) and BlackRock (NYSE: BLK) during the third quarter, which was essentially offset by the one-time non-cash compensation costs recorded in the first quarter.

These one-time items, in aggregate, increased both full year net revenues and non-interest expenses by approximately $2.0 billion, resulting in a slightly negative net impact to 2006 net earnings of $72 million, or $0.09 per diluted share. Adjusted to exclude the impact of those one-time items, full year 2006 net earnings were $7.6 billion, up 48% from 2005, and net earnings per diluted share were $7.68, up 49%. On the same basis, pre-tax earnings of $10.4 billion increased 44%, as net revenues rose 26% to $32.7 billion; the pre-tax profit margin was 31.9%, up 4.1 percentage points; and the return on average common equity was 21.6%, up 5.6 percentage points. Reconciliations of full year results to those adjusted to exclude the net impact of the one-time items appear on Attachment IV to this release.

"We are extremely pleased with Merrill Lynch's performance for the year and the fourth quarter," said Stan O'Neal, chairman and chief executive officer. "By virtually any measure, our company completed the most successful year in its history. Revenues, earnings, earnings per share and return on equity all grew strongly as a result of our continued emphasis on broadening the asset classes and capabilities we can offer clients, expanding our geographic footprint, diversifying our business mix, managing and deploying our capital more effectively, and investing in top talent. We finished the year positioned better than ever to capitalize on the array of opportunities still emerging around the world as a result of what we believe are fundamental and long-term changes in how the global economy and capital markets are developing."

Fourth quarter 2006 net earnings were $2.3 billion, and net earnings per diluted share were $2.41, up 71% from the year-ago quarter but down 24% from the third quarter of 2006, which included the one-time net gain from closing the BlackRock transaction. Similarly, pre-tax earnings of $3.4 billion were up 65% from the year-ago period but down 19% from the third quarter, as net revenues of $8.6 billion were up 27% from the year-ago quarter and down 13% sequentially. The fourth quarter pre-tax profit margin was 39.0%, and the annualized return on common equity was 25.6%.
Excluding the one-time merger-related net benefits in the third quarter of 2006 from the sequential comparisons, Merrill Lynch's fourth quarter 2006 net earnings and diluted earnings per share were both 21% higher than the third quarter; pre-tax earnings were 42% higher; net revenues were 8% higher; and all those fourth quarter results would have set quarterly records. Reconciliations of the third quarter results to those adjusted to exclude the net impact of the BlackRock merger appear on Attachment III to this release.

Business Segment Review:
During the fourth quarter of 2006, Merrill Lynch modified its business segment reporting to reflect the management reporting lines established as a result of the BlackRock/MLIM merger, as well as to better reflect the economic and long-term financial performance characteristics of the underlying businesses.
Effective with the merger, MLIM ceased to exist as a separate business segment, and Merrill Lynch's equity investment in the merged BlackRock business is being managed together with its other wealth management businesses. Accordingly, a new business segment, Global Wealth Management (GWM), was created, consisting of Global Private Client (GPC) and Global Investment Management (GIM). GPC and GIM revenues are both comprised of revenues from businesses that create, manage and distribute investment products and services for private clients and small businesses. GPC revenues arise primarily from the distribution of such investment products, including specialized brokerage, advisory, banking, trust, insurance and retirement services. GIM revenues arise primarily from the creation and management of such investment products, including revenues from a business that creates and manages hedge fund and other alternative investment products for GPC clients, which had formerly been included within GPC; and Merrill Lynch's share of net earnings from its ownership positions in other investment management companies, including the merged BlackRock. Apart from the new investment in BlackRock and the previously owned MLIM business, which had been reported as a separate business segment, earnings from such ownership positions were previously reported in Global Markets and Investment Banking (GMI). Prior-period business segment data have been restated to reflect this presentation.
The full year comparisons in the following discussion of business segment results exclude the impact of the $1.8 billion, pre-tax, one-time compensation expenses incurred in the first quarter of 2006. These one-time compensation expenses were recorded in the business segments as follows: $1.4 billion in GMI, $281 million in GWM and $109 million in MLIM. The impact of the closing of the BlackRock merger during the third quarter is reflected in the Corporate segment. A reconciliation of segment results with these amounts appears on Attachment V to this release.

Global Markets and Investment Banking (GMI)

GMI generated record revenues and pre-tax earnings for both the fourth quarter and full year 2006, as targeted investments around the world to expand and diversify its portfolio of businesses and geographic reach continued to enable the group to capitalize on a favorable market environment.

-- GMI generated $18.9 billion in net revenues for the full year 2006, up 37% from 2005, driven by record revenues in both Global Markets and Investment Banking. Pre-tax earnings were $7.1 billion, up 43% from the prior-year period. The pre-tax profit margin was 37.6%, up from 36.0% in 2005 demonstrating operating leverage even as substantial investments were made across the business.

-- GMI's fourth quarter 2006 net revenues were $5.4 billion, up 55% from the year-ago quarter. Compared with the fourth quarter of 2005, net revenues increased in all three major business lines:

-- Fixed Income, Currencies and Commodities net revenues of $2.3 billion increased 70%, setting a quarterly record, driven by every major business line, in particular record revenues from credit products, commodities and foreign exchange, as well as strong growth from trading interest rate products.
-- Equity Markets net revenues of $1.8 billion increased 49%, driven by nearly every major business line, led by the private equity, proprietary trading and cash trading businesses.
-- Investment Banking net revenues of $1.3 billion set a quarterly record, up 41%, as record revenues from debt and equity origination more than offset a decline in revenues from merger and acquisition advisory activities.
-- Pre-tax earnings for GMI were $2.6 billion, up 73% from the year-ago quarter, driven by the strong revenue growth and continued discipline over expenses, especially compensation expenses. The fourth quarter 2006 pre-tax profit margin was 48.4%, compared with 43.4% in the prior-year period.
-- At the beginning of the fiscal first quarter of 2007, Merrill Lynch completed its acquisition of the First Franklin mortgage origination and servicing businesses from National City Corporation (NYSE: NCC) for $1.3 billion.

Global Wealth Management (GWM)

GWM generated strong revenue and earnings growth in 2006, driven by GPC, which in the fourth quarter generated its best revenue performance of the year. GPC continues to improve its product capabilities and technology to enable Merrill Lynch Financial Advisors (FAs) to offer their clients outstanding service, positioning the FA as an essential partner. GWM's strong performance in a favorable market in both the quarter and the year underscored the effectiveness of GPC's strategy of revenue and product diversification and annuitization, and its success in growing client assets by retaining and adding FAs.
-- For the full year 2006, GWM's net revenues increased 12% over 2005 to $12.1 billion, driven by strong growth in GPC, as well as GIM. Pre-tax earnings increased an even stronger 23%, to $2.7 billion, demonstrating the operating leverage in this business even as investments for growth continued throughout the year. GWM's pre-tax profit margin was 22.5%, up 2 percentage points from 20.5% in 2005.
-- GWM's fourth quarter 2006 net revenues were $3.3 billion, up 13% from the 2005 fourth quarter:
-- GPC's net revenues increased 10% to $3.1 billion, driven by record fee-based revenues, which reflected both asset growth and flows into annuitized-revenue products. Net interest revenues also increased significantly due to the favorable trend in market interest rates.
-- GIM's net revenues increased 80% to $211 million, due primarily to Merrill Lynch's investment in BlackRock, which began to contribute during the 2006 fourth quarter. Merrill Lynch recorded an estimate of its share of BlackRock's net earnings in revenues.
-- GWM's fourth quarter pre-tax earnings of $759 million were up 19% from the year-ago quarter, driven by the growth in revenues. The pre-tax profit margin was 23.1%, up 1.2 percentage points from 21.9% in the prior-year period, driven by the impact of the investment in BlackRock which was partially offset by higher compensation expense and additional litigation provisions.
-- Turnover among FAs, particularly top-producing FAs, remained very low. FA headcount reached 15,880 at quarter-end, an increase of 180 during the fourth quarter and 720 for the full year, as GPC continued to employ its disciplined strategy of actively recruiting and training high-quality FAs.
-- Client assets in products that generate annuitized revenues ended the quarter at $613 billion, up 16% from the end of 2005, and total client assets in GWM accounts were a record $1.6 trillion, up 11%. Net inflows of client assets into annuitized-revenue products were a record $18 billion in the fourth quarter, and total net new money was $22 billion, bringing the full year totals to $48 billion and $61 billion, respectively.

Merrill Lynch Investment Managers (MLIM)
MLIM produced record pre-tax earnings in 2006 as the business generated strong relative investment performance and improved net flows leading up to the merger with BlackRock at the end of the third quarter.
-- MLIM's net revenues for 2006, reflecting only nine months of operations, increased 5% over those for the full year 2005, to $1.9 billion, driven by strong net sales and asset appreciation. Pre-tax earnings increased 27% to $746 million, and the pre-tax profit margin was 39.3%, up nearly 7 percentage points from 32.4% in 2005.
-- On September 29, 2006, Merrill Lynch merged MLIM with BlackRock in exchange for a total of 65 million common and preferred shares in the newly combined BlackRock, representing an economic interest of approximately half. An estimate of the earnings associated with Merrill Lynch's investment in BlackRock is recorded in the GIM portion of the GWM segment.
Additional Items:
Compensation Expenses
Excluding the one-time compensation expenses in the first quarter and the one-time net impact of the BlackRock merger in the third quarter, full year 2006 compensation and benefits expenses were 46.2% of net revenues, compared to 47.8% for the prior-year period.
Non-compensation Expenses
Total non-compensation expenses for the full year 2006 were $7.2 billion, up 14% from 2005. For the fourth quarter of 2006, non-compensation expenses were $1.9 billion, up 6% from the prior-year period, and were 22.4% of net revenues, down from 26.9% in the 2005 quarter. Details of the significant changes in non-compensation expenses from the fourth quarter of 2005 are as follows:
-- Communication and technology costs were $477 million, up 16% due primarily to costs related to technology investments for growth.
-- Brokerage, clearing, and exchange fees were $294 million, up 32% due primarily to higher transaction volumes.
-- Professional fees were $264 million, an increase of 37% due to higher legal, consulting and other professional fees associated with increased business activity levels.
-- Advertising and market development costs were $193 million, up 10% due primarily to higher travel expenses associated with increased activity levels.
-- Other expenses were $347 million, down 27% due primarily to lower litigation provisions.
Total non-compensation expenses increased 6% sequentially, largely due to increases in litigation provisions and professional fees related to increases in business activities.
2. Merrill Lynch to Buy First Republic

January 2007

Merrill Lynch & Co., the biggest U.S. retail brokerage, said Monday it will buy San Francisco-based wealth manager First Republic Bank for $1.8 billion in cash and stock.

The transaction allows Merrill Lynch to tap into $10.7 billion of assets held by First Republic, which provides investment services including trust banking and luxury home lending. Because it caters to the wealthy, First Republic attracts hefty deposits and has few credit problems, the companies said.

This marks Merrill's biggest takeover in about a decade, and is part of a wider strategy to offer banking services for its more affluent customers. The New York-based company last year took a 50 percent stake in money manager BlackRock, and also bought mortgage bank First Franklin Financial Corp. last year.

"First Republic will enable Merrill Lynch to accelerate its strategic objective of growing its high net worth business," said Robert J. McCann, president of Merrill Lynch's private client business.

He said last year the company was in talks with a number of smaller money management firms around the world to bolster the unit's reach. Among deals secured overseas has been a joint venture with Mitsubishi Tokyo Financial Group Inc. to target wealthy customers in Japan.

First Republic would become a stand-alone division within Merrill Lynch Bank & Trust Co., maintaining First Republic's name and San Francisco headquarters. Merrill Lynch expects to close the deal in the third quarter, pending shareholder and regulatory approvals.

Merrill Lynch offered $55 per share for First Republic, split evenly into cash and stock. The offer represents a 43.6 percent premium to First Republic's Friday closing price on the New York Stock Exchange.

Shares of First Republic rose $15.29, or 40 percent, to $53.59 in morning trading on the New York Stock Exchange. Merrill shares dipped 95 cents to $93.58 in the NYSE.

Merrill Lynch, which earned $5.12 billion in 2005, said it would repurchase on the open market the number of shares issued to complete the deal. Merrill expects the acquisition to add modestly to earnings by the end of 2008.

First Republic has 43 offices located in key metropolitan markets across the United States, including Silicon Valley, Los Angeles, Las Vegas, Portland, Seattle, Boston, Greenwich, Conn., and New York City.

The company has $7.9 billion in deposits and $7.6 billion in outstanding loans. Net income after paying preferred dividends totaled $46.3 million for the nine months.

Jim Herbert and Katherine August-deWilde will continue as chairman and CEO and president and COO, respectively. Current directors will serve as the division's advisory board, which will continue to be led by the bank's current chairman, Roger Walther.
Fitch Affirms Merrill Lynch IDR at 'AA-'; Rates Merrill Lynch Bank & Trust Co., FSB; Outlook Stable

May 29, 2007 5:29 PM CDT

NEW YORK-- (BUSINESS WIRE) -- Fitch Ratings affirms the credit ratings of Merrill Lynch & Co., Inc. (Merrill Lynch) (NYSE:MER) and its subsidiaries. Ratings are based on a consolidated view of the firm and are uniform for each of the subsidiaries that issue debt. The Rating Outlook remains Stable. As of March 30, 2007, total long-term debt of $208.9 billion was outstanding, short-term borrowings were $20.2 billion, and deposits totaled $84.9 billion. See below for a list of ratings.

Merrill Lynch's long-term Issuer Default Rating (IDR) of 'AA-' indicates very high credit quality with strong capacity for timely payment of financial commitments. Merrill Lynch prudently manages its balance sheet which is characterized by reasonable leverage and high levels of liquidity. The company centrally manages its market, credit and operational risks. The Stable Outlook reflects Fitch's expectation that revenue and earnings growth is sustainable without compromising risk standards, or incurring disproportionately greater leverage.

The company has realized record profits for four consecutive fiscal years, with improved pre-tax margins. FY 2006 record profits resulted from strong pre-tax earnings in all businesses. First quarter 2007's strong performance continues the positive quarterly trend attributable to several businesses in each sector.

Merrill Lynch's global strategy entails both organic development and acquisitions. Recently completed and/or pending purchases have been discrete operations that immediately contribute scale and/or niche competencies. Fitch believes that the company has sufficiently robust risk management and internal controls to address any incremental risks of newly acquired businesses.

Investments in the mortgage arena are consistent with management's stated goals to operate a fully integrated mortgage platform. This model - which is not unique - gives the company greater control over product type and distribution. Operating losses in Merrill Lynch Bank & Trust Co., FSB (where the residential mortgage business is located) have been mitigated to date by strong earnings in other businesses and active portfolio management. The pending First Republic purchase will expand the company's wealth management footprint. Fitch will monitor the impact on earnings, capital and value-at-risk that these expanded activities will have on the company regarding the pursuit of more proprietary trading and principal investments.

The IDRs of Merrill Lynch Bank & Trust Co., FSB (MLBT-FSB) equal its parent because it is an essential component of the Merrill Lynch franchise. MLBT-FSB offers a variety of real estate financing services, and deposit products for Merrill private clients and other retail customers. MLBT-FSB owns the First Franklin operations, a recently acquired subprime originator and servicer. This investment satisfies a key objective for Merrill: development of a vertically integrated mortgage platform. In addition, the parent's commitment is evident in its ongoing provision of financial and managerial resources. The rating reflects the extremely high probability that Merrill Lynch would support MLBT-FSB and its creditors. Long-term uninsured deposits are rated 'AA.' They are notched above the senior unsecured rating because uninsured depositors of insured depository institutions are expected to benefit from the National Depositors Preference Act.

The following ratings are assigned:

Merrill Lynch Bank & Trust Co., FSB

--Long-term deposits 'AA';

--Issuer Default Rating (IDR) 'AA-';

--Short-term deposits 'F1+';

--Short-term 'F1+';

--Individual 'B';

--Support '1'

--Support Rating Floor 'No Floor'.

The following ratings are affirmed with a Stable Outlook:

Merrill Lynch & Co., Inc.

--Issuer Default Rating (IDR) 'AA-';

--Long-term senior: 'AA-';

--Preferred stock 'A+';

--Subordinated Debt 'A+';

--Short-term 'F1+';

--Individual 'B';

--Support '5'.

Merrill Lynch Bank USA

--Long-term deposits 'AA';

--Issuer Default Rating (IDR) 'AA-';

--Short-term deposits 'F1+';

--Short-term 'F1+';

--Individual 'B';

--Support '1'.

Merrill Lynch Canada Finance

--Issuer Default Rating (IDR) 'AA-';

--Long-term senior 'AA-';

--Short-term 'F1+';

--Individual 'B';

--Support '1'.

Merrill Lynch Finance (Australia) Pty LTD

--Short-term 'F1+'.

Merrill Lynch International Bank Limited

--Issuer Default Rating (IDR) 'AA-';

--Short-term 'F1+';

--Individual 'B';

--Support '1'.

Merrill Lynch & Co., Canada Ltd.

--Short-term 'F1+';.

Merrill Lynch Mexico, Casa de Bolsa

--Long-term Senior 'AAA(mex)';

--Short-term 'F1+(mex)'.

Merrill Lynch S.A.

--Issuer Default Rating (IDR) 'AA-';

--Long-term Senior 'AA-';

--Support '1'.

Merrill Lynch Preferred Capital Trust III

--Trust Preferred 'A+'

Merrill Lynch Preferred Capital Trust IV

--Trust Preferred 'A+'.

Merrill Lynch Preferred Capital Trust V

--Trust Preferred 'A+'.

Merrill Lynch Capital Trust I

--Trust Preferred 'A+'

Merrill Lynch Capital Trust II

--Trust Preferred 'A+'

DSP Merrill Lynch Capital Limited

--Guaranteed Debt 'AAA';

--Short-term 'F1+'.

Merrill Lynch Derivative Products AG

--Long-term Issuer Default Rating (IDR) 'AAA';

--Counterparty Risk 'AAA'.

Aug 07

3. Merrill Lynch’s newly appointed MD and Global head of Climate change, Abyd Karmali, joins leading finance executives to address the challenges and opportunities presented by sustainable finance

Karmali is just one of the new speakers who will join over 40 senior executives from the finance sector to discuss the key environmental challenges facing investors and retail banks at a time of environmental, and market, instability.

LONDON August 8th

The summit, to be held on the 18th-19th of September in London will address all of the key factors that will influence retail banks’ lending strategies and how investors form their future portfolios. Some of the main themes addressed include: Implementing Equator Principles 2 and the requirements of the IFC; communications between investors and beneficiaries; the impacts of a carbon constrained economy on investor choices; new opportunities and key areas for stable future investments.

Another confirmed addition to the conference proceedings is a specialist Equator Principles pre-conference Masterclass, held by Linklaters’ Head of Environment, Vanessa Havard-Williams.

Although more and more banks are now signing up to the Equator Principles, pledging to ensure that the projects they finance are developed responsibly, research suggests that putting their commitments into practice is currently a major challenge for banks. Hence The Sustainable finance summit will feature the first ever practical equator principles workshop, based on case studies and specifically designed to help participants deliver Equator Principles 2 (EP2) compliant loans, and address compliance breaches.

Issues raised at the workshop, held on the 17th of September will then be discussed further among the 200 delegates attending the Sustainable Finance Summit on the 18 – 19th September in London.

More information on both workshop and summit can be found at

4. Merrill Lynch restricts media access to reports

Apr 23, 2007

Merrill Lynch is scaling back the media's access to research reports about equity opinions and stock lists to further protect the company's products, the Wall Street titan said Monday.
Beginning Monday, the media's access to such reports will be "significantly restricted," the company said in a news release.
Merrill will consider reporters' requests for reports about companies and industries "on a case-by-case basis," said Susan Walley, Merrill's head of global research communications and media relations.
The new rules come in the wake of a June 2006 lawsuit filed by Merrill, Morgan Stanley against the New Jersey-based Web site The suit alleges that the site misappropriated and infringed on the copyrights of their proprietary equity-research reports. The litigation is still pending.
As time-sensitive research materials, the companies' reports are meant exclusively for clients. According to the companies, the value of the research to potential investors lies in the limited dissemination of timely analysis.
Meanwhile, reporters' access to research about macroeconomic topics such as foreign exchange and investment strategy won't change significantly, Merrill said.
The changes were instituted to "address a growing concern regarding the misuse of our proprietary research products," Walley said in a statement.
According to its Web site,'s members get "breaking analyst comments as they are being disseminated by Wall Street trading desks." The site charges a monthly or annual fee.

4. Merrill Lynch: "Consults 3.0" Will Shake Things Up

Large distributors are exerting ever greater influence over fund flows. Asset managers without access to these platforms are at a significant disadvantage. These are often the smaller players that are less able to offer favorable revenue sharing agreements or support the ongoing sales and marketing needs of large distributors like Merrill Lynch, UBS, or Wachovia.

All this may change. Though no public announcement has been made, Merrill Lynch is rumored to have plans to create a new distribution platform, commonly referred to as Consults 3.0. Under Consults 3.0, Merrill would assume control for all of the buy/sell orders of the funds on its platform, meaning that firms would have to pass along this information in advance.

Instead of the 40 - 50 basis points paid to firms on Consults, Consults 3.0 participants would reportedly receive 20 - 25 basis points to account for Merrill's assumption of clearing responsibilities. However, given Merrill's scale, these costs would be relatively low. So what does this mean for asset management firms?

Here's our initial perspective on the winners and losers in a Consults 3.0 world:

Winners: Smaller firms willing to hand over the buy/sell decisions in order to gain access to the distribution opportunities promised by the platform.

Losers: Larger firms unwilling to see their fees cut in half or hand over information pertaining to the strategies of their funds.

Other potential implications include:

Marketing & Sales: Because the fund companies managing the underlying portfolios within Consults 3.0 will most likely not be transparent to advisors, branch-level wholesaling and other types of marketing support will no longer be as important as they have been in the current environment.

National Accounts: However, National Accounts will still play an important role in positioning products to achieve shelf space. However, sales approaches will need to become increasingly analytical in nature as distributors' research teams increasingly become the primary decision-makers.

The most significant roadblock is:

Competitive Intelligence: Although Merrill Lynch divested itself of its asset management capabilities, many firms will still draw concerns from having to hand over their buy/sell decisions.

Though no formal plans or timetable has been set, it's becoming clear that large distributors are looking for ways to leverage their scale to increase profits. This could have a dramatic impact on fund distribution. And while Merrill Lynch is the first name to be associated with such plans, consider that others will likely follow if Consults 3.0 is a success. SmithBarney's parent, Citigroup, recently divested itself of asset management, just as was done by Merrill Lynch. Fund companies should monitor this trend and consider the implications for their longer-term distribution strategies.

5. Merrill Lynch's painful lesson in subprime
Augest 2007

Problems with subprime mortgages have buckled Wall Street-run hedge funds, roiled global credit markets and pushed several of First Franklin's rivals into bankruptcy, leaving thousands of U.S. workers jobless.

And First Franklin's lawsuits against mortgage brokers show the San Jose, Califorina-based lender has experienced the same problems as the rest of the industry. Court papers show First Franklin has been burned by lax underwriting, fraudulent home appraisals and borrowers exaggerating their incomes.

A few bad loans at First Franklin are not a disaster for Merrill Lynch, a financial powerhouse with $1 trillion in assets, But the subprime mortgage industry's crisis has sidelined Merrill's strategy for buying the lender in the first place. Home loans generated by First Franklin are the raw material Merrill Lynch packages into mortgage-backed bonds sold to investors. That market has nearly evaporated.

Merrill Lynch executives are not sure if First Franklin will add to 2007 profits, as they had forecast last year.

So far it appears to be a drag on earnings.

Merrill declined to provide any detailed information about First Franklin's performance. But recently filed reports with U.S. banking regulators show that Merrill Lynch Bank & Trust Co., where a lot of the First Franklin franchise is housed, lost $111 million through the first half of 2007. Securitization and trading revenue tied to First Franklin's loan making are not included in that unit's results.While First Franklin relies heavily on an army of independent brokers to find borrowers and submit loan applications, other U.S. lenders have abandoned that channel, citing problems with underwriting and outright fraud.

"Overall, our experience with mortgage brokers has been excellent," Merrill spokesman Bill Halldin said.

But if brokers turn in fraudulent loan documents, the company said it takes aggressive action, including ending the relationship or going after them in court.

In March 2007, First Franklin Chief Executive Andrew Pollock sought to put distance between his company and subprime lenders going out of business. His testimony before the Senate banking committee highlighted how First Franklin originated loans with higher credit scores, lower delinquency rates, and generally higher performing mortgages than many other subprime lenders.

"A critical component of our success has been the disciplined underwriting we embrace," he said.

Pollock did not talk about loans like the given to lab assistant Marielite Hardy who received $670,000 in loans from First Franklin in March 2006 to buy a multi-family home in Revere, Massachusetts.

Her loan application, submitted by mortgage broker National Lending Corp., listed her monthly income as $12,000. This month, First Franklin accused the Houston-based broker of inflating Hardy's income by about $9,000, according to a lawsuit filed in U.S. District Court in Boston.

After funding the Hardy loans, First Franklin sold the first loan on the property to a U.S. unit of London-based bank HSBC in the secondary mortgage market.

First Franklin said Hardy did not make a single payment. HSBC demanded First Franklin buy back the loan, according to court records. First Franklin did and then sold it in a distressed sale, taking a $295,908 loss.

Several months after First Franklin funded Hardy's loan, the lender received her wage verification from her employers. The documents showed that her wage income fell far short of justifying the money she received.


6. Merrill Lynch to cut mortgage jobs
September 2007

Merrill Lynch & Co. on Monday said it will cut jobs at its First Franklin Financial Corp. unit, which it acquired less than a year ago, as weakness in the mortgage market weighs on the lender's business.

The world's largest brokerage, which paid $1.3 billion to buy First Franklin in December, would not detail how many jobs would be cut. First Franklin had 2,800 employees at the start of the year. Employees of the San Jose, Calif.-based mortgage lender were informed last week of the cuts.

Merrill rival Lehman Brothers Holdings Inc. already cut more than 2,000 positions in its mortgage lending unit, and competitor Bear Stearns Cos. shed about 240 jobs.

An estimated 50,000 positions have been cut so far this year in the mortgage industry. Besides the major U.S. banks, dozens of small and medium-sized mortgage lenders have gone bust because of defaults and delinquencies from borrowers with shaky credit histories.

"First Franklin has been successful over 26 years because of its ability to adapt to changing market conditions," Merrill said in a statement. "We have adjusted our staffing levels to be in line with current business requirements."

Bill Halldin, a spokesman for Merrill, would not comment beyond the official statement.

Merrill Lynch bought First Franklin in a late bid to cash in on the booming subprime loan industry, which catered to people with poor credit. The brokerage was criticized for paying too much for First Franklin, which was one of the nation's largest non-prime mortgage originators.

Part of Merrill's strategy was to convert First Franklin's loans into mortgage-backed securities, and then sell them in the secondary market.

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