Merrill Lynch Profits Plunge 98% : Shearson Lehman Bros. Has $95-Million 4th-Quarter Loss

Merrill Lynch & Co. on Monday reported a 98% drop in fourth-quarter earnings, while Shearson Lehman Bros. posted a $95-million loss for the period, becoming the first of a parade of major securities firms expected to announce poor earnings or losses stemming from the October market crash and subsequent industry slowdown.

Merrill Lynch, the nation’s largest brokerage, said it earned $3.5 million in the quarter ended Dec. 31, down sharply from $182.8 million in the year-ago final quarter.

Merrill Lynch’s after-tax earnings were better than expected, as most analysts had expected a net loss. But earnings from operations, excluding one-time items, were worse than expected, analysts said.

Net profit was helped by higher-than-expected one-time gains of $69.2 million from a change in vacation policy and $51.5 million from insurance settlements. They were partially offset by a $47.4-million pretax charge for employee severance expenses and $55 million in charges for trading losses and other costs related to the crash.

“It would appear the (net profit) was the result of creative accounting,” said Perrin Long, securities industry analyst for Lipper Analytical Securities.

Excluding one-time items, Merrill Lynch would have posted an after-tax loss of $53 million in the quarter, said Brenda Davis McCoy, securities industry analyst at Paine Webber.

Merrill Lynch’s operations in the quarter were hurt by sluggishness in investment banking, as new stock issuance and underwriting volume plummeted after the crash, McCoy said.

“Revenues went down, and they couldn’t adjust expenses down fast enough,” analyst Long said. The firm’s large operating loss and recent layoffs--it has said companywide job losses could reach 2,000 to 3,000 by Jan. 31--”suggest that the first two quarters of 1988 aren’t going to be much better,” Long added. “Normally you don’t let go of people if you think things are going to get better.”

Merrill Lynch’s revenue for the quarter slumped to $2.7 billion from $2.8 billion the year before.

For the year, the firm reported net earnings of $390.6 million, down 14% from a record $454.3 million in 1986. Revenue for 1987 hit a record $10.9 billion, up from the $9.6 billion reported in 1986.

Possibly reflecting surprise that the firm did not post a net loss for the quarter, Merrill Lynch stock rose 50 cents per share Monday to close at $23.25 in New York Stock Exchange composite trading.

Shearson, which will become the nation’s largest brokerage following its acquisition of E. F. Hutton Group, said its fourth-quarter loss of $95 million contrasted with a record profit of $106 million in the year-ago quarter. Revenue during the period fell to $1.25 billion from $1.32 billion in the year-earlier period.

The firm, 62% owned by American Express, said it had an after-tax loss of $72 million in October due to the crash. Shearson reported fourth-quarter gains in commission and investment advisory revenue, but investment banking and trading revenue declined.

For the full year, Shearson’s net income fell by 70.3% to $101.2 million from $341.3 million in 1986.