Merrill sparks fears of soaring costs

By Steve Slater and Jonathan Stempel

LONDON/NEW YORK (Reuters) - Merrill Lynch's MER.N surprise write-down ratchets up pressure on rivals to cut the values of their own subprime assets as they grapple with mounting debts and economies weaken.

The global credit crisis, roughly a year under way, could cause total damage of around $1 trillion (500 billion pounds) to balance sheets of financial services companies. That's far above the more than $400 billion of write-downs taken so far.

Merrill's revelation of a $5.7 billion (2.8 billion pounds) write-down and plans to sell $8.5 billion of stock heightened worry of more pain to come from European lenders UBS (UBSN.VX) and Barclays (BARC.L), and from Wall Street and U.S. commercial banks.

Citigroup (C.N), Bank of America Corp (BAC.N), Lehman Brothers Holdings LEH.N and Wachovia WB.N, for example, each still have billions of dollars of exposure to complex debt, mortgages, or both.

About $4.4 billion of the Merrill write-down came from a sale of $30.6 billion of collateralized debt obligations -- which are typically backed by mortgages -- to private equity firm Lone Star Funds for $6.7 billion, or 22 cents on the dollar. Merrill had valued the CDOs at $11.1 billion just four weeks ago.

"It was a very aggressive markdown," said Chris Henson, a portfolio manager at MFC Global Investment Management in Toronto. "The question is, is that now the clearing price for anyone who has CDOs?"

Prospects of more write-offs and credit losses have already battered lenders' shares. The Standard & Poor's Financials Index .GSPF, for example, had through Monday fallen 32 percent this year, twice the S&P 500's .SPX decline.

"The current environment is not one where people are prepared to give the benefit of the doubt," said Gerry Rawcliffe, group credit officer for financial institutions at Fitch Ratings. "There's a broad loss of confidence in banks."