(Reuters) - Merrill Lynch MER.N is the riskiest major broker after Bear Stearns BSC.N, with gross exposure to subprime collateralized debt obligations of $30.4 billion, 3.3 times the sector average, Wachovia Capital Markets said.
Merrill also had the worst liquidity ratio at 52 percent, compared to Goldman Sachs Group Inc (GS.N) and Lehman Brothers Holdings Inc LEH.N, and now has the highest leverage in the industry at 31.9 times, analyst Douglas Sipkin said.
Shares of Merrill Lynch rose 7 percent to $44.05 in morning trade, after upbeat earnings from Goldman Sachs and Lehman Brothers led to a rebound in financial stocks.
Sipkin, however, said fears about the ability of U.S. investment banks to continue as going concerns are misguided.
"While liquidity conditions are more challenging than at any time in recent history, the failure of BSC was more a management issue than a market issue in our opinion," the analyst wrote in a note to clients.
Liquidity markets are clearly stretched, but the reputation and capital position of all other brokers will continue to be superior to that of Bear Stearns, he said.
JPMorgan Chase & Co (JPM.N) on Sunday agreed to buy Bear Stearns, slammed by a sudden cash crunch, for just $2 a share -- more than 90 percent below its Friday close.
The analyst upgraded Goldman Sachs to "outperform" from "market perform" partly on its superior capital position relative to competitors and as it would likely benefit more than any firm from Bear Stearns' problems.
He said liquidity measures at Lehman Brothers look "reasonable."
"The loss of Bear Stearns triggered immediate fear and uncertainty amongst the group. However, if Lehman can survive, we believe it will by default gain material market share in mortgages now and especially in the future if the business turns," Sipkin said.
Wachovia issued the research note before Goldman Sachs and Lehman reported quarterly results.
Reporting by Tenzin Pema in Bangalore; Editing by Vinu Pilakkott