In an ironic bit of sloganeering, the current Merrill Lynch (MER) corporate promotion is "Even In Today’s Economy, There Are Smart Places For Your Money." It may not be lost on the shareholders of Merrill Lynch that they are an outstanding exception.

In what appeared to be a frenzy of front-running bad news, Merrill’s shares dropped over 11% during the regular session to reach $24.32, close to a multi-year low.

The real action came after the close. Merrill said it would take a third quarter write-down to off-load toxic debt to the tune of $5.7 billion. The brokerage added that it would sell $8.5 billion in new stock.

According to Reuters, Merrill’s president said in May that things at the firm were perfectly OK. "John Thain (Merrill’s CEO) has been very clear that we have sufficient capital and don’t have a need to raise additional common equity for the foreseeable future. When we raised this capital in January, we had a lot of demand so we went beyond what we needed."

How could ten short weeks make such a difference? The answer can be found in the pages of the IMF’s new Global Financial Stability Report. It predicts that total losses at financial firms due to the mortgage crisis will hit $1 trillion. By most calculations, that means there are still several hundred billions in write-downs unaccounted for. Future losses at Merrill and its peers are virtually guaranteed.

It remains tempting to believe that banks and brokerages have seen the worst and that the recovery process following the mortgage horror can begin now. In reality, Merrill can’t vouchsafe that it will not have to return to the capital markets. Neither can Citigroup (C), Morgan Stanley (MS), or Lehman (LEH).

No analyst can plumb the depths of the current financial troubles because housing markets are still falling and foreclosures are still rising. Defaults on auto loans and credit cards may be in their early stages.

Nothing is inevitable, but the odds that the banking industry is moving into a period of further trouble is close.

Douglas A. McIntyre

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