The credit markets were moving along, the banks’ quarterly numbers weren’t quite as bad as expected and then…Merrill Lynch.

Private equity and banking sources say that Merrill’s doozy of a write down has spread fresh worries that another shoe is about to drop on the credit markets. The credit system that drove the leveraged buyout wave was showing signs of improvement since the Labor Day holiday last month. JPMorgan and Citigroup’s quarterly numbers weren’t great, but even they turned out a profit. Goldman issued what appeared to be another great quarter. But Merrill’s numbers left some wondering if more banks would follow with another round of big hits to their balance sheets. 

“The magnitude of MER’s relative losses lead us to suspect that this is a MER specific issue, but it may lead people to believe other investment banks were not conservative enough in their quarter-end marks,” according to a Sandler O’Neill note.
    
Another round of write-downs, particularly if it’s worse than expected, would probably pump more jitters into the credit world. That in turn would thicken the debt logjam currently limiting banks from lending to private equity players. In short, it’d be ugly for all involved, including buyout firms, their banks, institutional investors, the overall market….

So is there another shoe to drop?

(Photo. Shoes worn by actress Jennifer Connelly, Reuters file).