Widespread reports claim that when Merrill Lynch (NYSE: MER) reveals fourth-quarter results next Thursday, losses could be substantially larger than the $12 billion many expected. In fact, the damage could total $15 billion or more.

Why, then, did Mr. Market just push Merrill shares up more than 5%? The reaction probably stems from several factors. In part, this is just one more example of people selling on the rumor and buying on the news. For months now, investors have been very pessimistic about Merrill, expecting the worst. Putting losses in concrete terms allows investors to adjust their estimates of the company's value.

In addition, the buying surge could be part of the age-old tradition of UPOD -- underpromise, overdeliver. Is there any good reason whatsoever for Merrill's new CEO John Thain to wax overly optimistic about Merrill's near-term prospects? I don't think so. Instead, Thain's best bet is to be as aggressive and conservative as possible. Most investors seem to expect that this will mean recognizing larger losses than necessary to leave room for future upside.

We might see this elsewhere as well. Vik Pandit over at Citigroup (NYSE: C) will be busy trying to clean things up after the departure of Chuck Prince, and we could see a similar situation there. Such behavior might be less likely from Alan Schwartz at Bear Stearns (NYSE: BSC), since Jimmy Cayne is still intimately involved with the company and Schwartz is a longtime insider. All the same, Schwartz will have to make something happen over there.

More financial Foolishness:

Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. The Fool's disclosure policy has never once been caught with its pants down. Of course, it doesn't actually wear pants.