The exchange traded fund (ETF) iShares Dow Jones U.S. Broker-Dealers Index (IAI) fell sharply on heavy volume Wednesday following a sell-off in shares of Merrill Lynch (MER), which accounts for about 8% of the fund’s holdings. Currently, IAI is down 2.2% year-to-date.

Merrill reported earlier that it lost about $2.3 billion in the third-quarter, as its write-downs of collateralized debt obligations and subprime mortgages totaled $7.9 billion, above the $4.5 billion write-down the company estimated on Oct. 5. Collateralized debt obligations (CDOs) are securities backed by subprime mortgages that are sold to investors based on their risk appetite.

Shares of Merrill Lynch slumped to a two-year low after credit rating agencies, including Standard & Poor’s, Fitch Ratings, and Moody’s Investors Service downgraded the broker’s long-term and short-term debt following its third-quarter report, reports Wanfeng Zhou for Thompson Financial. The much higher-than-expected charge is the company’s first quarterly loss in six years, and it stems from Merrill’s big push into Merrill took a leadership role in underwriting CDOs in 2006 and 2007, when subprime mortgage lenders all but threw lending standards out the window, reports Matthew Goldstein for BusinessWeek. Even though Merrill Lynch has rebounded more than 5% in mid-day trading, for the year, it’s looking downright ugly.


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