Oct. 8 (Bloomberg) -- Merrill Lynch & Co., the world's largest brokerage, was downgraded by two rival firms after reporting $5 billion of losses from mortgage-related investments and buyout financing.

JPMorgan Chase & Co. and Credit Suisse Group cut their recommendations to ``neutral'' in reports published today while reducing their earnings estimates for this year and next. Sanford C. Bernstein & Co. and Keefe, Bruyette & Woods lowered Merrill profit estimates and maintained ``outperform'' stock ratings.

Merrill Lynch, which is based in New York, said Oct. 5 that it will report a third-quarter loss of as much as 50 cents a share because of writedowns on mortgages, asset-backed securities and loans for leveraged buyouts. Merrill fired its head of fixed income, Osman Semerci, last week and replaced him with David Sobotka.

``A recovery for Merrill's fixed-income business will be challenging given its significant exposure,'' wrote JPMorgan's Kenneth B. Worthington. ``The new fixed-income management may take down the firm's risk profile, leading to lower returns in coming quarters.''

Merrill Lynch fell $2.55, or 3.3 percent, to $74.12 at 4 a.m. in New York Stock Exchange composite trading, down 20 percent for the year.

Worthington lowered his profit estimate for 2007 to $6.05 from $7.67 while cutting the 2008 estimate by 10 cents to $8.15. Credit Suisse analyst Susan Roth Katzke cut her estimate for this year to $5.85 from $7.90 and next year by $1 to $7.85.

Bernstein Estimates

Sanford Bernstein's Brad Hintz reduced his 2007 profit outlook to $5.67 from $7.66 and the 2008 estimate by $1.81 to $8.10. Hintz lowered his price target for the shares by $15 to $100, without changing his recommendation.

``Our analysis had previously concluded that Merrill was the least exposed to the fixed-income market,'' Hintz wrote. ``We were wrong -- Merrill appears to have had a breakdown of its risk-management process.''

Keefe Bruyette's Lauren Smith cut her estimate for this year to $6.05 from $7.81 while maintaining the one for next year at $9.05 per share.

Goldman Sachs Group Inc.'s profit for the quarter ended in August rose 79 percent after almost $1.5 billion of losses on leveraged loans. Lehman Brother Holdings Inc.'s total writedown on LBO financing and mortgages was $700 million.

Only Citigroup Inc., the largest U.S. bank, has reported a bigger writedown for the period, though it still expects a profit. All the firms are based in New York.

Goldman Sachs analyst William Tanona cut his estimates for Merrill's 2008 and 2009 earnings last week after the third- quarter loss was revealed.

Reported Losses

The world's largest banks and securities firms have reported credit and market losses of at least $21 billion after defaults on subprime mortgages -- which reached a five-year high in the second quarter -- contaminated securities backed by home loans and other types of debt.

In December Merrill purchased San Jose, California-based First Franklin, the 10th-largest subprime lender in 2006 according to Inside Mortgage Finance. At $1.3 billion, it was the most expensive acquisition of a subprime lender disclosed by a Wall Street firm last year.

Last year Merrill was the largest underwriter of collateralized debt obligations, many of which are based on bonds whose returns are backed by mortgage payments.

Merrill has ``meaningful exposure'' to subprime loans through First Franklin and maintains a No. 2 position in CDO origination, ``both of which are unlikely to recover in the near term,'' JPMorgan's Worthington said.

To contact the reporter on this story: Yalman Onaran in New York at yonaran@bloomberg.net.

Last Updated: October 8, 2007 16:13 EDT