Today, Merrill Lynch provided a damper to the financial sector rally that has occurred over the past two days by reporting even worse quarterly earnings than analysts expected.

The firm announced a loss of $4.7 billion in the second quarter, it’s 4th consecutive quarterly loss, driven by $9.4 billion in losses related to CDOs, ineffective hedges against those CDOs and residential mortgage exposure. Net revenues in the quarter were a negative $2.1 billion, compared to $9.5 billion in the second quarter of last year. The loss for the quarter would have been worse, save for a $3.5 billion tax benefit.

Amid the gloom and despite the writedowns CEO John Thain said on the conference call that the “core franchise continues to perform well despite the extremely challenging market.” The last 12 months surely make that statement hard to swallow for shareholders--$18.65 billion in losses and $43.4 billion in write-downs. Shares of Merrill Lynch had fallen 7 percent in after hours trading. The firm reported a loss of $4 billion in principal transactions—once a profit center.

In the global private client group, by far the steadiest business line at all the wirehouse firms these days, net revenues were $3.2 billion, down 3 percent from the same quarter last year. Pre-tax income for the unit was $738 million, a 25 percent decline from the prior year period. According to the press release, the lower revenues were “reflective” of less client activity and origination activity in a “challenging environment.” Net new client assets were down $5 billion, meaning client money left, an outflow the firm attributed to “seasonal income tax” related needs of clients.

The firm also reported a net increase of 140 FAs in the quarter, adding that “turnover, particularly among first and second quintile FAs declined during the quarter and continues to outperform the industry average.” That contrasts with an internal report Registered Rep acquired that said that through May the firm had experienced net recruiting losses of 60 FAs (Read Morgan’s Magic in the July issue).