July 17 (Bloomberg) -- Merrill Lynch & Co., the third- biggest U.S. securities firm, reported a wider-than-forecast quarterly loss as the credit contraction saddled the company with $9.7 billion of writedowns.

Moody's Investors Service cut Merrill's credit rating and the firm's shares fell after it posted the second-quarter net loss of $4.65 billion, or $4.97 a share. The results, which compared with earnings of $2.14 billion a year earlier, were worse than the most pessimistic analyst forecast in a survey by Bloomberg.

Chief Executive Officer John Thain cut about 4,200 jobs in the first half of the year and is divesting assets to stem record losses and a 43 percent drop in Merrill's share price during 2008. The company said it completed a $4.43 billion sale of its stake in Bloomberg LP and plans to sell a controlling interest in Financial Data Services Inc. Merrill's charges from the credit crisis now exceed $46 billion.

The quarterly loss was ``inexplicably larger than what people expected,'' Michael Holland, chairman of Holland & Co., which oversees more than $4 billion, said in a Bloomberg Television interview.

Merrill shares fell as much as 7 percent after the close of regular trading in New York, after gaining almost 10 percent today. Analysts at Citigroup Inc., Oppenheimer & Co. and Wachovia Corp. had predicted the firm would book at least $5 billion of writedowns in the quarter.

Trailing Rivals

Merrill failed to keep pace with its rivals. Goldman Sachs Group Inc., the biggest U.S. securities firm, reported earnings of almost $2.1 billion for the three months ended May 30. Morgan Stanley, the industry's second-largest company, posted $1 billion of net income. Both are based in New York.

Merrill today confirmed the sale of its 20 percent stake in Bloomberg LP, the parent of Bloomberg News. Merrill said it is financing the sale to Bloomberg Inc., the parent of Bloomberg LP. The investment bank said it also signed a letter of intent to sell a controlling share of mutual fund administrator Financial Data Services based on an enterprise value of more than $3.5 billion.

Thain, 53, abandoned an effort to sell Merrill's 49.8 percent share of fund manager BlackRock Inc. In a statement today, BlackRock said the two firms ``agreed to extend and strengthen our global distribution agreement.''

Merrill had negative revenue of $2.12 billion in the second quarter, compared to $9.46 billion of income a year earlier, after markdowns on assets devalued by the credit crisis.

Bond Insurance

Writedowns included $3.5 billion to account for the plummeting value of collateralized debt obligations, or securities backed by other bonds. Another $1.3 billion of charges were taken on residential mortgages. The firm also reduced the value of bond insurance contracts by $2.9 billion, and lowered the value of leveraged loans by $348 million.

The company lost $1.7 billion on securities held in its U.S. banks.

Revenue at the company's brokerage, the world's biggest with 16,690 financial advisers, fell 3 percent to $3.2 billion.

Thain, who joined Merrill in December, has sold about $18 billion of common and preferred shares to bolster capital, and overhauled risk-management as the company booked more than $37 billion of credit-market losses in the previous three quarters. The company's stock has fallen 57 percent since Thain became CEO Dec. 1.

CDO Losses

Banks and brokers have taken more than $435 billion of writedowns and credit losses since the beginning of last year as mortgage-backed securities, CDOs, leveraged loans and other fixed-income assets lost value. Merrill's charges now top those at Citigroup Inc., the largest U.S. bank. Citigroup reports its quarterly results tomorrow.

Merrill's CDO holdings dropped to $19.9 billion at the end of June from $26.3 billion at the end of March, according to the firm's statement, mostly because of writedowns.

Moody's downgraded Merrill's long-term credit rating one level to A2, the sixth-highest available, and gave the debt a stable outlook. Standard & Poor's, which cut Merrill's rating on June 2 to A, the sixth-highest, today affirmed that assessment and said the outlook remains negative.

Second-quarter fixed-income trading revenue was negative $8.07 billion and equity-trading revenue was $1.73 billion, down from $2.15 billion a year earlier. Debt underwriting generated $367 million in revenue, down 22 percent, while stock underwriting revenue fell 38 percent to $338 million.

Hunkering Down

The investment-banking business is grappling with a plunge in fees from advising companies on mergers and stock and bond sales, as CEOs and corporate treasurers hunker down for a recession.

Thain today also broke off talks with Silverstein Properties Inc. about relocating the investment bank's headquarters to a skyscraper under construction at the World Trade Center site in downtown Manhattan. Discussions between Merrill, Silverstein and the Port Authority of New York and New Jersey, which owns the site, ``ended over economic terms,'' Port spokesman Steve Coleman said today in a statement.

To contact the reporters on this story: Josh Fineman in New York at jfineman@bloomberg.net; Bradley Keoun in New York at bkeoun@bloomberg.net.

Last Updated: July 17, 2008 18:59 EDT