That rally in financial stocks is about to fizzle out, thanks to a painful second-quarter report from Merrill Lynch.

The brokerage lost $4.6 billion, or $4.95 per share. The loss not only disappointed analysts in general, who were expecting a loss of $1.91 per share, it managed to even surpass the low expectations from the biggest Merrill bear on the Street: Oppenheimer's Meredith Whitney, who predicted a loss of $4.21 per share.

The results are likely to weigh on its chief executive John Thain, who inherited a dismal state of affairs when he took over late last year, but who has also suffered from his own missteps since then.

As expected, Merrill announced moves to beef up its capital base to help compensate for its losses. The firm sold its 20 percent stake in Bloomberg for $4.4 billion and it said it has a nonbinding letter of intent to sell a controlling interest in its subsidiary Financial Data Services, which it says is worth $3.5 billion.

In total, Merrill expects to raise $8 billion from the sales. In a twist only an investment banker can truly appreciate, Merrill is also providing the debt financing for both deals.  

While the capital will certainly be welcomed, it's not clear that it will do much for Merrill's business except offset the losses it continues to post. Chief executive John Thain tried to downplay these concerns on a conference call with analysts, however. "We've more than replaced the capital lost," he said.

He also reiterated that the bank's liquidity has improved, and now stands at about $92 billion, up from $79 billion at the end of last year. He added that the bank is in a "comfortable spot" in terms of its capital.

The Bloomberg sale in particular is a bit of a letdown. Just last month, Thain said the stake was valued at as much as $6 billion. But with Bloomberg being the only bidder and Merrill desperate for cash, the firm may even be fortunate to have raised that much.

Merrill also posted negative revenue for the period due to write-downs from mortgages, C.D.O.'s, exposure to monolines, and other credit holdings totaling more than $9 billion on a gross basis. Once again, this figure surpassed the low expectations on the Street, as most analysts had been expecting to see $5 billion to $6 billion in write-downs.

On the conference call, Thain tried to paint a better picture than the numbers showed by citing improvements in the company's core operations and its progress in reducing its exposure to many of the riskiest assets on its balance sheet.

After rallying more than 9 percent today, shares of Merrill erased all their gains in after-hours trading.