More Bad News for Merrill

LOSSES & LAWSUITS

NEW YORK - US investment bank Merrill Lynch has said an accounting error has led to it overstating cashflow from its derivatives business by $43.1 billion over three years, discovered as a result of a filing by the US Securities and Exchange Commission (SEC). Meanwhile, Merrill has also discontinued mortgage originations from its US subprime-mortgage subsidiary First Franklin. Merrill blamed First Franklin's closure to new mortgages on the deteriorating US mortgage market. The subsidiary had already cut 70% of staff since the first subprime defaults last summer.

Merrill says it will restate its accounts to correct its derivatives oversight, and stressed that the accounting errors would not affect profits, revenues or capital levels because the mistakes in sums of cash received and used were equal. The mistakes were uncovered during the bank's preparations to release its 2007 annual results.

After monthly billion dollar writedowns by the major investment banks on their subprime infected derivatives, coupled with January's Societe Generale rogue trading scandal, this accounting discrepancy increases concerns over the big banks' exposure to future losses on opaque products.