Merrill Lynch sought to bolster its balance sheet and reduce its risk last night when it announced moves to raise $8.5 billion (£4.27 billion) and the sale of $11.1 billion worth of high-risk mortgage-backed securities.

The group said it would record a $4.4 billion writedown in its third-quarter from the sale of the securities, known as collateralised debt obligations (CDOs), or pools of mortgage bonds, in a disposal that represented the majority of Merrill’s remaining CDO portfolio.

Merrill said it planned to raise $8.5 billion by selling shares equivalent to more than a quarter of its market capitalisation in a move that will significantly dilute the existing investors’ ownership.

Some $3.4 billion of the shares will be acquired by Temasek, the Singaporean wealth management fund. Temasek is already an investor in Merrill, after buying 87 million shares in December.

John Thain, Merrill Lynch’s chief executive, is pushing to reduce risk at Merrill, which has been particularly hard hit by the US housing crisis.

The group has made an overall loss of $18.7 billion in the past four quarters, after taking about $40 billion worth of writedowns on CDOs and other mortgage-related investments. Mr Thain called last night’s CDO sale a “significant milestone in our risk-reduction efforts”.

Shares in Merrill Lynch, which fell by 12 per cent in New York trading during the day after the International Monetary Fund said that it saw no end in sight for America’s housing slump, fell a further 5 per cent in after-hours trading after the group’s announcement.

Fears about Merrill Lynch and other groups with large exposure to the housing market, such as Citigroup, American International Group and Fannie Mae, helped to drag shares down across the board.

The S&P 500 fell by 23.39 points, or 1.9 per cent, to 1,234.37, its lowest since reaching an almost three-year low on July 15. The Dow Jones industrial average lost 239.60, or 2.1 per cent, to end the day at 11,131.10.

Merrill Lynch acquired the CDOs that it sold yesterday for $30.6 billion. By the end of the second quarter this year they had declined in value to an estimated $11.1 billion and Merrill agreed yesterday to sell them to Lone Star, the private equity fund, for $6.7 billion.

Mr Thain has also begun selling what he says are nonstrategic assets to offset the sub-prime mortgage losses. Earlier this month, he sold Merrill’s 20 per cent stake in Bloomberg, the financial news and data group, for about $4.43 billion. He also sold a controlling interest in its subsidiary Financial Data Services for about $3.5 billion pretax to an unnamed buyer.

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