Whitney now expects a loss of $2.70 per share, up from 50 cents per share.

Whitney expects Merrill Lynch to take a writedown of up to $7 billion because of bad bets on the mortgage industry. The writedowns come on bonds and other debt backed by mortgages, many of which are backed by subprime mortgages -- loans given to customers with poor credit history. As mortgages have increasingly defaulted, investor demand for the bonds has dwindled.

Merrill Lynch already took a writedown of nearly $8 billion in the third quarter related to the declining value of mortgage-backed debt.

While Whitney cut her fourth-quarter estimate for the investment bank, she affirmed her "Sector Perform" rating on the stock, as she said Merrill Lynch's recent announcement of new investments by Temasek Holdings and Davis Selected Advisors is a step in correcting the problems at the bank.

On Monday, Merrill Lynch said it would sell a stake in itself to Temasek, an investment arm of the Singapore government, for $4.4 billion in common stock with an option to purchase an additional $600 million. Davis Selected Advisors agreed to purchase $1.2 billion in common stock.

The extra cash is needed to help bolster the company's balance sheet as it takes writedowns.

Whitney said the next step for Merrill Lynch will be to take further writedowns and continue restructuring the balance sheet, which is likely to take most of next year.

Shares of Merrill Lynch rose 5 cents to $53.95 in premarket trading.