Merrill officials said that the firm's work force had been reduced by about 1,500 in the last three weeks.

Merrill officials said they did not believe the downgradings would have a significant effect on the firm's financing costs.

A major aim of the investigation, several Merrill officials said, is to determine whether fraud was committed.

In the weeks leading up to the settlement, Merrill officials said they would not accept such a stiff penalty.

Merrill officials declined to say exactly what had gone wrong with the lending business.

Merrill officials strongly deny there is any link between the events.

And Merrill officials do not see a conflict there.

One Merrill official said a settlement appeared more likely than ever.

About $900 million of the bonds had been acquired in approved activities, Merrill officials said.

Merrill officials hope to sell the bonds next week at yields of about 14 percent.