Merrill Lynch yesterday became the latest bank to succumb to the turmoil in the credit markets, saying it would report a third-quarter loss after writing down about $5 billion (£2.45 billion) of sub-prime-related losses.

Merrill, which this week removed two senior executives in the wake of the crisis, said that the loss would be as much as 50 cents a share. Analysts had been expecting a profit of $1.43.

The loss came after Merrill was forced to write down about $4.5 billion of loans linked to collateralised debt obligations (CDOs) and sub-prime mortgages and about $463 million, net of fees, related to private equity loans.

Stan O’Neal, the chairman and chief executive, said: “The impact of this difficult market was much more severe in certain of our . . . businesses than we expected earlier in the quarter.”

The two senior bankers ousted on Wednesday were Osman Semerci, the head of Merrill’s fixed-income, commodities and currencies (FICC) division – where most of the sub-prime losses lie – and Dale Lattanzio, the head of the division’s US operations.

Merrill Lynch’s sub-prime mortgage unit, First Franklin Financial, has also cut jobs and closed branches this year as defaults and foreclosures on mortgage loans rose.

Although Merrill said that it was “beginning to see signs of a return to more normal activity levels in a number of markets”, analysts questioned whether the worst was over for the Wall Street bank.

One source, who declined to be named, said the news was likely to foreshadow severe job cuts, both at Merrill and throughout the sector. “All the investment banking people who structured CDOs are being fired, and on both sides of the Atlantic. It’s a massive market so a lot of people are going to go,” the source said.

Merrill’s problems echo similar statements from other investment banks, including Bear Stearns, Lehman and Morgan Stanley, which in recent weeks have all announced writedowns and significant redundancies related to the sub-prime crunch.

On Monday, Citigroup stunned investors with a warning that turmoil in the mortgage markets will wipe as much as $3.3 billion off its third-quarter profits.

UBS unveiled a $3.4 billion write-down as it removed Huw Jenkins, the chief executive of its investment banking division.

Despite the profit warning, Merrill’s shares rose 2.5 per cent to $76.67, as investors breathed a sigh of relief that the news could have been worse.

Times Recommends

• C&G axed - 1,660 jobs to be lost
• UK house prices rise 1.1% as buyers return
• Mixed reaction to US banks repaying bailouts