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Tickers in this Article: MER, UBS, JPM
On Thursday, Merrill Lynch (NYSE:MER) reported first quarter post-dividend loss of $2.14 billion, or $2.19 per share, driven by a new write-downs of $6.5 billion. Specifically, in the first quarter, the company witnessed investment banking revenue decline by 69%.

Terrible, terrible news, right? After the earnings announcement, Merrill Lynch stock gapped down, and then recovered throughout the trading day, eventually edging positive. The proper way to deliver bad news, it seems, is to be up-front about the losses and offer a recovery plan for the future.

Just the Facts
Here's the skinny: Merrill recovered during the session because Wall Street has stopped asking, "Will banks see write downs?" The questions now sound more like, "How much? And how are you going to handle it?"

Merrill is handling the situation exactly as is should by stating the facts, taking the charge, cutting costs and restructuring. Savvy investors know this will only help to bolster the bottom line in the long run. First, Merrill announced that it would cut 3,000 more jobs, on the heels of axing 1,000 jobs at First Franklin, a subprime mortgage division. The hit is barely a scratch in the company's total 63,000 employees, not that that's much consolation to the 4,000 people losing their jobs.

In addition to the job cuts, the company announced it will also save $800 million per year by taking a restructuring charge now of $350 million. What's more, the company also mentioned that even in light of the $12 billion that is it has already raised during the subprime debacle, it could possibly raise additional funds if needed. However, if it does, it will work with preferred shares, not common stock, which would be a bonus to common shareholders as the move would not dilute traded shares outstanding - even though net income suffers through dividend payments. (To find out why they would use preferred shares, check out Why do share prices fall after a company has a secondary offering?)

Bond-Dumping Probe
One spot of worry, though, is news that Merrill Lynch, along with UBS AG (NYSE:UBS) and JPMorgan Chase (NYSE:JPM) all received subpoenas from New York Attorney General Andrew Cuomo. The subpoenas are part of a probe into the potential mishandling of auction bond-dumping in January. The probe involves how auctions were handled and how the debt was sold, according to a Reuters article.

This sounds bad, but Cuomo isn't dumb. He knows that subpoenas and an investigation needed to take place, but adding more pressure to big banks while they are on the brink of recovery would be just plain stupid. Most likely, the whole thing will blow over with a slap on the wrist, including new policies and non-blockbuster fines. Someone will probably hand in his or her resignation, too. (To read about the investigations of New York's previous attorney general, read Eliot Spitzer - Man Of A Thousand Scandals.)

What about the Future?
Second quarter results will probably be filled with some of the same news, but investors seeking a turnaround will want to look more toward comments about guidance. At present, many big banks are trickling statements into the market alluding to recovery the end of 2008. While the credit squeeze is a problem, big banks aren't hurting as bad as many think. "U.S. banks in particular have been active in raising capital of about $85 billion relative to declared losses of $190 billion to date, including from sovereign wealth funds," the IMF stated in the World Economic Outlook Update from April 8.

Wall Street has accepted the fact that most banks are going to take a loss. What's important now is how quickly they can recover.

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