Merrill pay bonanza despite $14.1bn write-off

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Merrill Lynch paid out a record $15.9bn (£8bn) in pay and bonuses to its employees last year, despite plunging $8.6bn into the red.

The company said it was writing off a further $14.1bn of its investments in mortgage-backed debts, taking the total write-downs to $22bn and making it Wall Street's biggest loser since the mortgage market collapsed in the summer.

Investment banks typically pay out just under half of their net revenue in bonuses, but the write-offs in its mortgage-related businesses meant that Merrill had negative net revenue last year.

John Thain, the newly appointed chief executive, defended the 6 per cent increase in compensation expenses, saying many parts of the bank enjoyed strong or even record performances.

"I have been very impressed with how many of the Merrill employees talk about their commitment to the company and talk about their long tenure at the company," he said. "I want to reiterate how strong most of the businesses have done this year, and we are very optimistic as we look out to 2008."

The sums spent on employee pay and bonuses in the final three months of the year contributed to a much higher than expected quarterly loss, the worst in the company's history. Jeff Harte, analyst at Sandler O'Neill, said: "Compensation expense of $4.3bn was 46 per cent above our expectations, which implies the company is focused on employee retention which is important in the wake of such significant losses."

The size of Merrill's compensation pool means that the five biggest US securities firms paid their 185,687 employees $66bn in 2007, including an estimated $39bn in bonuses. That amounts to average pay of $353,089 per employee and an average bonus of $211,849, down only mod-estly from the previous year despite the mortgage market meltdown. In 2006, the figures were $364,940 and $218,957, respectively.

Mr Thain, a former executive at Goldman Sachs and most recently chief executive of the New York Stock Exchange, promised that Merrill would no longer be taking the sorts of investment risks that could wipe out its profits, as happened in 2007. He announced the hiring of Noel Donohoe, another Goldman Sachs alumnus, as co-chief risk officer.

It was the unexpected scale of Merrill's exposure to risky mortgages and mortgage-relateddebt products – and an apparent inability to quantify that exposure – which led to the ousting of Stan O'Neal, Mr Thain's predecessor in October. Earlier this week, Mr O'Neal was summoned to appear before Congress to explain a retirement package estimated at $160m.

Merrill said yesterday that it was writing down the value of its mortgage-backed collateralised debt obligations (CDOs) by a further $11.5bn in its fourth-quarter results, on top of the $7.9bn it announced at the end of the third quarter. There was also a new $2.6bn writedown of the value of insurance it has taken out with cash-strapped bond insurers.

"I expected a large loss and it was," said Rose Grant, a fund manager at Eastern Investment Advisors in Boston. "We were looking for a 'kitchen sink' quarter, where we can get these problems behind us and look at other areas of the business and see where the earnings are coming from. We're about 80 per cent there."

Mr Thain said Merrill would redouble its search for investment opportunities in emerging markets in 2008, to make up for a slowdown in the US. He added that he expected Merrill's credit rating to remain stable, because it moved quickly to shore up its balance sheet. In the past month it has tapped the Singaporean, Kuwaiti and South Korean governments, among other investors, for more than $12.2bn in emergency funding.

Elsewhere, the investment bank Lehman Brothers said it will cut 1,300 jobs as it scales back its US mortgage lending business. It had already cut about 2,500 jobs last year after shutting its sub-prime mortgage unit that lent to borrowers with poor credit histories. The bank will take a $40m charge as part of the plan.