This from the Wall Street Journal…..

Merrill Lynch & Co.’s announcement Friday that it would take a $5.5 billion hit to third-quarter earnings is exposing the weak oversight exercised by top Merrill executives as it became a big force in the mortgage-securities business.

Wall Street has been reeling from the recent credit crunch tied to questionable home mortgages, with several companies taking multibillion-dollar write-downs. But Merrill is taking the biggest charge and is the only major U.S. firm so far that has said it will report a loss for the third quarter.

The announcement gave a boost to Merrill’s shares, which rose $1.89, or 2.5%, to $76.67 in 4 p.m. trading Friday on the New York Stock Exchange. That reflected investors’ relief that Merrill is trying to put the problems behind it.

The psychology that enables the markets to raise Merrill’s stock price after reporting over 5 billion dollars in losses continues to puzzle me. Especially considering that only a couple months ago Merrill claimed that therr exposure to sub prime was limited. As Wall Street Journal article above says….

In July, before the market worsened, Merrill’s chief financial officer, Jeff Edwards, said in a conference call with investors that the firm’s exposure to subprime mortgages was “limited, contained and appropriate.” These mortgages are typically made to borrowers with poor credit records, and their value has plunged this year.

Given that kind of track record and fact that the ARM reset charts that seem to show that the worst is yet to come, why is everyone relaxing now?