June 27 (Bloomberg) -- Merrill Lynch & Co. had its second- quarter loss estimate increased by Lehman Brothers Holdings Inc. on expectations subprime-related writedowns will be more than twice as big as previously thought.

Lehman analyst Roger Freeman said New York-based Merrill, the third-largest U.S. securities firm, will probably lose $2.78 a share, compared with his earlier prediction of a 64-cent loss. Freeman increased his writedown estimate for the quarter to $5.4 billion, from $2.4 billion previously, he wrote in a note today.

Analysts and investors are reversing their predictions that the worst of the credit market contraction is over after almost $400 billion of writedowns and losses by the world's largest financial institutions. Freeman said the downgrades of so-called monoline insurers earlier this month will force Merrill to book more losses.

``We believe that Street estimates will come down as the Street adjusts for the significant impact of these monoline- credit valuation adjustments,'' Freeman wrote in the note.

MBIA Inc. and Ambac Financial Group Inc. were stripped of their top grades by Moody's Investors Service last week, following downgrades by Fitch Ratings and Standard & Poor's. Merrill may have a writedown of $3.1 billion related to the downgrades, Freeman said.

Merrill fell 35 cents to a five-year low of $32.70 in composite trading on the New York Stock Exchange at 4:10 p.m. The shares have lost 39 percent this year.

Goldman, Bernstein

Sanford C. Bernstein & Co. and Goldman Sachs Group Inc. said yesterday that Merrill will lower the value of its assets by more than previously thought, after three straight quarterly losses and writedowns of almost $18 billion.

Sanford Bernstein's Brad Hintz cut his estimate for Merrill to a loss of 93 cents a share from a profit of 82 cents and predicted a writedown of $3.5 billion. Goldman analyst William Tanona reduced his Merrill estimate to a loss of $2 from earnings of 25 cents and predicted a writedown of $4.2 billion.

CNBC on-air editor Charles Gasparino reported today that Merrill's writedowns may total $5 billion, citing unidentified people in the firm.

Goldman earlier this week reversed a call on financial stocks, saying its May 5 recommendation telling investors to add to U.S. financial stocks was ``clearly wrong.'' Merrill on June 17 cut its rating on Lehman to ``neutral,'' just a week after telling clients to buy.

Buy Recommendations

Of the 39 analysts tracked by Bloomberg who follow stocks in the Amex Securities Broker/Dealer Index, 32 produced losses for investors. Investors who bought brokerages on ``buy'' recommendations, sold when they switched to ``hold'' and speculated prices would decline when analysts said ``sell,'' lost 17 percent in the last year through June 23, compared with the S&P 500's 11 percent drop.

Citigroup, the biggest U.S. bank, yesterday had its second- quarter estimates cut by Goldman and Sanford Bernstein on expectations of more writedowns related to the subprime market and the downgrades of monoline insurers.

Goldman's Tanona estimates an $8.9 billion writedown in the quarter for New York-based Citigroup, the biggest U.S. bank, and he reduced his estimate to a loss of 75 cents from profit of 25 cents.

To contact the reporter on this story: Josh Fineman in New York at jfineman@bloomberg.net.

Last Updated: June 27, 2008 16:11 EDT