11:00AM New York – Merrill Lynch takes another write-down of $5.7 billion for the third quarter and is now likely to report fifth quarterly loss in a row. Chief executive John Thain has a growing credibility gap.

Merrill Lynch plans to raise $8.5 billion in capital and sell $30 billion of its troubled loans at a steep discount. Merrill Lynch stock fell $1.48 to $22.84. Merrill Lynch will also take $5.7 billion in asset write-down in the third quarter. So far Merrill has taken $41 billion in asset write-down since the credit crisis began a year ago. The latest offering will dilute shareholders by at least 40%.

Merrill Lynch, under the recently appointed chief executive John Thain has made management changes and implemented tighter risk controls. However, these changes at least for now are not halting a steady decline in the stock price. And Thain’s previous media statements have not turned out to be on the mark either.

There is a growing frustration among shareholders that Thain may not have a handle on the situation as executives at the company rake millions while shareholders count their losses.

Last December and March, Merrill Lynch sold stocks to Singapore based sovereign fund Temasek Holdings Pte Ltd and Kuwait Investment Authority at $48 per share and offered guarantees to compensate for losses if stock falls further. Since then the stock has fallen nearly 50% and is likely to decline more. Merrill’s total bill for this debacle is $2.5 billion.

Thain, in a number of public appearances has stated that Merrill Lynch’s exposure to risky loans has been contained and losses from sub-prime loans are not likely to rise. But they keep rising.

Only a day after the company released its fourth quarter earnings on January 18, 2008, chief executive John Thain on The Nightly Business Report news show on PBS channel said that ‘Merrill does not have a significant’ exposure to subprime loans and does not expect any more charges from the asset based securities.

Thain appears to be losing credibility with investors as losses mount and he continues to make positive statements about the quality of the assets held by the company. It appears that Thain may not have a handle on the company’s asset quality even after being at the helm for more than seven months. In the latest quarterly earnings conference call on July 17 Thain said, “We are in a comfortable spot in terms of our capital.”

Needless to say investors were rattled today when chief executive announces a plan to dilute shareholders by 40% after assuring them only ten days ago.

Thain after denying for months that Merrill needs capital was forced to raise $30 billion and sell stakes in businesses. These so called asset sales are not strictly generating cash at this time either. Merrill sold its 20% stake in Bloomberg News for $4.43 billion, but Merrill offered a loan to Bloomberg for this ‘sale’ and sold its Chicago based business of commercial finance to General Electric at undisclosed terms.

The yesterday’s announcement of a sale collateralized debt obligations to a unit of Lone Star Funds is again 75% financed by Merrill. Merrill has agreed to sell $30 billion of these mortgage assets which it valued at $11.1 billion at the end of the second quarter and has agreed to sell for only $6.7 billion. Most of it is funded by a loan from Merrill and any losses in CDOs of more than $1.68 billion will be absorbed by Merrill. Not exactly a transaction that gives lot of comfort to shareholders.

Merrill Lynch losses are likely to continue for a while as housing market falls further and dragging with it mortgage backed assets. Merrill Lynch with book value of $21 a share has $34 billion in prime mortgage backed assets, $1 billion of subprime residential mortgage assets and $4.5 commercial subprime mortgages, $1.55 billion of ‘Alt-A’ mortgages and $18 billion of sub-prime and commercial mortgages. All of these assets are expected to lose values in the next two quarters.

Shareholders of Merrill have suffered since Thain has been at the helm and pain in the near term is likely to continue. And just as executives collect millions in compensation at Merrill Lynch, investors continue to lose value of their holdings. Only recently, Thain hired one of his former colleagues at Goldman Sachs with reported compensation of more than $30 million.

Merrill Lynch (MER) traded as high as $97.02 on January 12 and since then has lost nearly 75% of its value and now trade at a ten-year low.