Nov. 2 (Bloomberg) -- Merrill Lynch & Co. fell the most in six years, leading financial stocks lower for a second day, after Deutsche Bank AG said the world's biggest brokerage may write down an additional $10 billion for losses on subprime assets.

``We have increasingly lost confidence in the financials of Merrill,'' Deutsche Bank analyst Michael Mayo said in a report today. ``Merrill may have additional credit rating downgrades'' should the New York-based firm be forced to write down the value of its debt holdings, Mayo said.

Merrill declined $4.91, or 7.9 percent, to $57.28 at 4 p.m. in New York Stock Exchange composite trading, extending this year's drop to 38 percent. The slide, the biggest since the Sept. 11, 2001, terrorist attacks, reduced Merrill's market value to about $49 billion, compared with $80 billion at the end of 2006.

Merrill Lynch unraveled in the past two weeks after reporting the biggest quarterly loss in its 93-year history, taking an $8.4 billion writedown that was almost double its own forecast. The disclosure forced Chief Executive Officer Stan O'Neal to step down on Oct. 30, and Merrill is searching for a replacement.

Regulators may be examining whether Merrill used off- balance-sheet transactions with hedge funds that were intended to postpone disclosure of losses, the Wall Street Journal reported today. Late in the afternoon, Merrill spokeswoman Jessica Oppenheim said the company has fully marked down all of its losses from collateralized debt obligations, the debt securities Mayo highlighted in his report.

`All' Exposure

``Merrill's marks reflect all of its exposure to CDOs regardless of how they're financed, on- or off-balance sheet,'' Oppenheim said in an interview.

Shares of the company rose to $58.15 in 4:26 p.m. trading after the market closed.

Merrill said in a statement earlier in the day that it has ``no reason to believe'' it made trades designed to hide losses. ``Such transactions would clearly violate Merrill Lynch policy,'' the company said.

The Securities and Exchange Commission has opened a probe into whether the company accurately disclosed what it knew about potential losses from subprime mortgages to investors, a person with direct knowledge of the case said Oct. 31.

At a meeting today with Merrill employees, Co-President Greg Fleming said he empathized with brokers and institutional salesmen who had to field calls from angry or concerned clients. An employee in Columbia, Tennessee, asked if another $10 billion of writedowns were coming.

`Risk Remains'

``We are subject to the market, and risk remains,'' Fleming said, not commenting directly on the Deutsche Bank report. ``We will do and are doing everything we can to mitigate it.''

Mayo, who called for the ouster of Citigroup CEO Charles Prince after the bank announced $6.5 billion in third-quarter writedowns and losses and a subsequent management shakeup, lowered his recommendation on Merrill shares to hold from buy.

``Our concern is on relying on a company's statement that has no CEO and is facing a potential SEC investigation and may have engaged in questionable private transactions,'' Mayo wrote in his note to investors.

In a further sign investors' confidence in the firm's creditworthiness is deteriorating, credit-default swaps tied to Merrill Lynch bonds climbed 15 basis points to 120 basis points, according to broker Phoenix Partners Group. The contracts, which protect bondholders against default, reached the highest level in more than five years earlier today, Credit Suisse Group said.

`Sleight of Hand'

The SEC will probably examine whether dealings with hedge funds complied with accounting rules or whether Merrill ``tried to engage in what looks like sleight of hand,'' said Peter Henning, a former attorney in the criminal division of the U.S. Justice Department who teaches at Wayne University in Detroit. The deals may be legal, depending on how firm Merrill's obligation was to buy back assets or the likelihood that it would be forced to do so, he said.

The SEC's ``concern will go back to what happened at Enron,'' the Houston-based energy-trading company that collapsed in an accounting scandal in 2001, Henning said. ``Are they temporarily offloading assets or securities to dress up their balance sheet in the short term?''

The share price decline, which earlier today was as steep as 13 percent, dragged other financial stocks lower. The Amex Securities Broker/Dealer Index fell 2.5 percent, extending yesterday's 4.9 percent plunge for the biggest two-day drop in more than a year.

`No Truth'

Goldman Sachs Group Inc., the largest securities firm by market value, fell 4.4 percent on speculation the New York-based company will announce additional writedowns of its own. Spokesman Lucas Van Praag said there was ``no truth in the rumors, some of which smack of rather poor attempts at market manipulation.''

Citigroup, the biggest U.S. bank, dropped to a four-year low yesterday after a CIBC World Markets analyst said the company may have to reduce its dividend to shore up capital. Shares of the New York-based bank declined 2 percent today.

Dow Jones newswire reported after the close that Citigroup's board plans to hold an emergency meeting this weekend, possibly to address more writedowns. The Wall Street Journal said Prince intends to resign.

Samuel Hayes, professor emeritus of investment banking at Harvard Business School in Boston, said there may be interest among rival companies to purchase Merrill Lynch, given the extent of the share price decline.

``It's really one of the icons of Wall Street and it's a lot stronger than the recent news stories would suggest,'' Hayes said in an interview. ``I would think that the board would not look with favor on any offers being made during this period of market price weakness. I just can't imagine there would be a fire sale.''

Merrill is a passive, minority investor in Bloomberg LP, the parent of Bloomberg News.

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

Last Updated: November 2, 2007 18:58 EDT