Three of the big U.S. rating agencies downgraded Merrill Lynch & Co. Inc. today, following its disappointing third quarter earnings and US$7.9 billion write down.

Fitch Ratings downgraded its ratings of Merrill Lynch and maintains its Negative Rating Outlook on the firm. “The size of trading losses and unrealized losses unexpectedly overwhelmed the performance of the consolidated firm,” it said.

“Historically, Fitch believed the company maintained sufficiently robust risk management that was commensurate with its risk appetite. However, the size of Merrill Lynch’s CDO position and subsequent loss reveal deficiencies in risk management. Fitch anticipates liquidity and pricing challenges to prevail in the market over the intermediate term potentially resulting in lower revenues (in select products/services), investment write-downs and/or fewer principal trading opportunities,” it added.

Moody’s Investors Service also downgraded its long-term ratings of Merrill Lynch. In explaining its downgrade, Moody’s said that the increase in the provision to US$7.9 billion from US$4.5 billion — announced just 19 days ago – was surprisingly large and supports its view that the firm suffered a risk control failure.

“The jump in the write-down suggests that management did not fully understand their exposures”, said Peter Nerby, a Moody’s senior vice president.

In the specific case of Merrill Lynch’s CDO business, Moody’s said that profit growth targets apparently superseded risk considerations. “Management allowed a sizeable concentration to develop and the resulting markdowns overwhelmed the benefits of Merrill Lynch’s business and revenue diversification. As a result, Merrill Lynch underperformed its industry peers by a wide margin”, Nerby said.

Standard & Poor’s also lowered its rating on Merrill. However, DBRS confirmed its ratings for the firm, adding that the trend on all ratings remains unchanged at stable.

“The confirmation reflects the strength of the company’s franchise and earnings power, as well as its strong liquidity and financial profile. Merrill’s strong underlying fundamentals are expected to help the company absorb the substantial loss this quarter and return to strong profitability in the coming quarters, even as markets remain turbulent,” it said.

DBRS notes that even with the large loss for the quarter, the company has generated about US$2 billion of positive net income in the first three quarters of 2007, driven by strong performance in the first half. Moreover, DBRS recognizes that the large loss was driven by a unique confluence of factors that led to disrupted markets and affected many large financial institutions.

Fitch said that its negative outlook on the firm will be resolved following an evaluation of strategic changes, efforts to improve risk measurement and management, and changes in the size or capacity of the fixed income sales and trading efforts. Fitch will also monitor the impact on earnings, capital and value-at-risk regarding the pursuit of more proprietary trading and principal investments.

Moody’s said resolution of the negative outlook will be driven by an initial focus on the potential for further losses remaining in Merrill Lynch’s disclosed US$15.2 billion of ABS CDO-related exposures and in its US$5.7 billion of sub-prime mortgage related exposures. Moody’s will also focus on changes to Merrill Lynch’s risk management framework.