Merrill, the next Bear Sterns

Thought the order was:

  1. Bear Sterns
  2. Lehman
  3. Merril
  4. UBS

If I remember correctly I heard that Goldman Sachs played it safe.

As an aside I know we hear alot about the billion dollar write offs for the banks we know in the US and Europe but little about Asian banks. I always thought that Asian banks/countries invested heavily in the financial products of the west and would be heavily exposed to the current financial conditions yet I see little on the news about major Asian banks in difficulty. Are there major Asian bank in difficulty that we’re just not hearing about over here?

It might be harder to find someone who can swallow Merrill without suffering a serious case of indigestion.

Not safe. They’ve got the highest VaR (variance at risk) of any of the banks as far as I know, even bigger than Citigroup or JP Morgan. They just played it better than the rest, or so they claim anyway.

While most of the other investment banks have been deleveraging, writing down their balance sheet, offloading assets etc. GS haven’t been. They have bet the company on the crisis passing by the end of the summer (hence the ‘light at the end of the tunnel’ comments from their CEO).

Reggie Middleton on boombustblog reckons that now that BS is gone, Morgan Stanley are the most indebted/over-leveraged investmnet bank.

Hank Paulson would not like to see his old company damaged by this.

Oops. Was a bit tired last night BD and should have put in Citibank at number 3. JP Morgan would be ahead of UBS. If your wondering were I got the rankings it was based on a chart on CNBC that was based on share trading after Bears collapse. Chart is based on memory as I cant seem to find it on the interweb.

A guy I went to college with who’s a trader also told me Lehmann were ‘next’. I’d be lying if I said I knew much about it myself tho

Well it’s now June and it looks like Lehmann are indeed ‘next’.

Will be very interesting to see the developments overnight.

You have to wonder who is actually trading with Lehmans at this stage, apart from the Fed of course.

I reckon Barclays will own them before the summer is over.

RUMOUR:

Seemingly Lehmann were using their own money to buy back shares after 2 pm…

Either management are very confident and know something we don’t, or they’re screwed!

Reminds me of another bank dear to my heart…

I’m gonna be brave and gamble here: I postulate that Goldman will own 'em within a week and the US taxpayer will pick up the tab. [subject to there being no new credible information!]

There is no information on the Lehman site, no press releases, nothing. Can only assume they’re putting a story together. You cannot delay with the truth. Will be interesting to see what other news gets out before opening tomorrow.

from FTAlphaville

**Singapore’s Temasek has agreed to buy $3.4bn worth of the public offering in a deal to avoid paper losses on the $5bn it invested in Merrill late last year
**
Pretty soon people will be talking about losing real money here!!!

It is impossible to believe a word these people say any more,they are in my opinion little better than “debt junkies” - everytime they get their fix it is DEFINITELY the last,no,no,never again. I have lost count of the times Merrill have stated that the latest write off is the last and they don’t need anymore capital,is it two or three ? Who cares,this won’t be the last for sure.An interesting point made in the article is the fact they chose to write down the debt that caused this mess in the fundraising but not in their earnings declaration,hmm…the authorities will no doubt be on top of this double quick -not.

Merrill to Sell $8.5 Billion of Stock, Unload CDOs (Update3)

By Bradley Keoun and Christine Harper
Enlarge Image/Details

July 29 (Bloomberg) – Merrill Lynch & Co., the third- biggest U.S. securities firm, will sell $8.5 billion of stock and liquidate $30.6 billion of bonds at a fifth of their face value to shore up credit ratings imperiled by mortgage losses.

Temasek Holdings Pte., the Singapore-owned fund that became Merrill’s biggest investor by acquiring shares in December, will buy $3.4 billion of the new stock, Merrill said yesterday in a statement. The New York-based company is paying Temasek $2.5 billion to offset losses on its earlier investment. Merrill will also book $5.7 billion of writedowns in the third quarter.

Almost $19 billion of net losses in the past year forced Chief Executive Officer John Thain to backtrack from assurances that the firm had enough capital to weather the credit crisis. Since taking the post in December, Thain has raised $30 billion in an effort to keep pace with mounting charges on mortgage bonds amassed by his predecessor, Stan O’Neal. Standard & Poor’s cut the firm’s debt rating last month and signaled that more downgrades were possible.

It does mark an attempt at curing the problem but at a tremendous cost to existing shareholders,'' said Charles Peabody, an analyst at Portales Partners LLC in New York who recommends selling Merrill shares.How can you be pleased by that? It’s a necessity.’’

UBS AG analyst Glenn Schorr estimates Merrill will report a third-quarter loss of $4.80 a share because of significant dilution'' from the stock sale. Schorr, who has aneutral’’ rating on Merrill, previously estimated earnings of 72 cents.

German Trading

Merrill rose 14 cents to $24.47 in German trading today. The company sold its 20 percent share of Bloomberg LP, the parent of Bloomberg News, earlier this month for $4.43 billion, 11 percent less than the $5 billion market value Thain placed on the stake in June. He also agreed to sell Financial Data Services, an in- house mutual-fund administrator worth $3.5 billion.

While third-quarter results and the future capital raise would be yet another burden, we do believe there is light at the end of the tunnel,'' wrote Douglas Sipkin, an analyst at Charlotte-based Wachovia Corp. who has amarket perform’’ rating on Merrill, in a note to clients today.

In yesterday’s statement, Merrill said it agreed to sell $30.6 billion of collateralized debt obligations – the mortgage- related bonds that have caused most of the firm’s losses – for $6.7 billion. The buyer is an affiliate of Lone Star Funds, a Dallas-based investment manager.

``Our consistent focus has been to opportunistically reduce risk, and in order to take advantage of this sizeable sale on an accelerated basis, we have decided to further enhance our capital position,’’ Thain, 53, said in the statement.

`Little Disheartening’

Merrill will provide financing for about 75 percent of the purchase price, according to the statement. The financing is secured only by the assets being sold, meaning Merrill would absorb any losses on the CDOs beyond $1.68 billion.

The sale will result in a third-quarter pretax writedown of $4.4 billion, Merrill said. Less than two weeks ago, the firm announced $3.5 billion of CDO writedowns for the second quarter that ended in June.

Bank of America Corp. analyst Michael Hecht estimates Merrill will report a full-year loss of $11.55 a share and he cut his price target for the stock to $40 from $47, according to a note to clients.

Why these assets are written down when you're selling them and weren't written down in your earnings is a question,'' said Ralph Cole, a senior vice president in research at Ferguson Wellman Capital Management Inc. in Portland, Oregon, which oversees $2.7 billion and doesn't own Merrill shares.This kind of announcement is surprising and a little disheartening.’’

Thain declined to comment through Merrill spokeswoman Jessica Oppenheim.

22 Cents

Merrill has lost almost 55 percent of market value this year. Only Lehman Brothers Holdings Inc. has fallen more on the 11- member Amex Securities Broker/Dealer Index, dropping 77 percent. Merrill fell 12 percent yesterday in New York Stock Exchange composite trading.

Thain, who worked as a mortgage trader during his 25-year career at Goldman Sachs Group Inc., said July 17 that he was hopeful'' that Merrill could sell its CDOs, while adding he didn'twant to do dumb things’’ by selling them too cheap.

In yesterday’s statement, Thain said, ``the sale of the substantial majority of our CDO positions represents a significant milestone in our risk-reduction efforts.’’

The CDOs Merrill sold to Lone Star were carried on the securities firm’s books at about $11.1 billion, indicating they already had been written down to about 36 cents on the dollar. The Lone Star sale values them at about 22 cents.

Fourth Share Sale

Merrill may sell as many as 356.5 million shares in the latest offering, the firm said yesterday in a presentation for potential buyers. That represents a 36 percent increase over the number outstanding at the end of June. The price of the new shares will be set today, according to the presentation.

The share sale is Merrill’s fourth since Thain took over following O’Neal’s ouster last October.

Thain raised $6.2 billion in December – when Temasek bought its initial 9.4 percent stake – and another $6.6 billion in January. That month, he told investors Merrill had attracted more than it needed. Since then, he has repeated that the firm’s capital was sufficient.

We're very comfortable with our position,'' Thain said on Jan. 30.We could have raised substantially more money. We turned people away.’’

Three months later he sold $2.55 billion of preferred stock. Then, after Standard & Poor’s cut Merrill’s credit rating to A from A+ on June 2, Thain announced he was considering a sale of Merrill’s stake in Bloomberg.

Temasek Compensation

When the firm reported a $4.65 billion second-quarter net loss on July 17, Thain said the firm’s resources were adequate.

``We believe that we are in a very comfortable spot in terms of our capital,’’ he said on a conference call with analysts.

In yesterday’s statement, Thain said the new capital became necessary because the completion of the Lone Star deal meant additional losses had to be booked.

Merrill was contractually bound to compensate Temasek and other investors who bought shares in the December and January offerings. The stock has since plummeted almost 55 percent. So in addition to the new public offering, Merrill will pay $2.5 billion to Temasek and issue an additional 195 million shares to the other investors, according to yesterday’s statement.

XL Hedges

Losses on CDOs and the associated hedging contracts have accounted for about $27 billion of the total $41 billion of total writedowns taken by Merrill over the past year. The firm was one of the largest underwriters of CDOs before the credit crisis hit last year, and Merrill was stuck with more than $50 billion of them on its books when buyers fled the market.

The remaining CDOs may be less worrisome to investors. About $7.2 billion of the $8.8 billion left are hedged with ``highly rated counterparties,’’ the firm said in the statement.

In addition to the losses from the Lone Star sale, Merrill said it will record a $500 million loss related to the termination of hedging contracts on CDOs with XL Capital Assurance. It took another $800 million maximum loss related to the potential settlement of hedges with other bond-insurers.

Moody’s Investors Service affirmed Merrill’s A2 credit rating today after the securities firm announced the asset sale.

``We think they have taken care of much of their troublesome exposure in structured finance and real estate,’’ said David Hendler, a bank analyst at CreditSights Inc. in New York.

To contact the reporter on this s

They’re not really buying $3.4bn, MER are giving them $2.5bn according to the previous agreement, so they are only paying $900 million.

However, they are still ‘averaging down’ or as someone else somewhere put it ‘throwing good money after bad’.

Heads you win, tails I lose…

from Bloomberg

What a joke…

So Lone Star sets up a new fund which has one asset, namely the CDO risk they bought off ML

ML gives the fund a loan for 75% and Lone Star commits 25% of equity

ML only has recourse to the CDO in that fund in the event the loan becomes delinquent (which it will if the value of that CDO risk deteriorates much further)

ML can lose 75%, Lone Star only 25%
But, Lone star has ALL the upside on the full 100% if it performs

I cannot believe the stupidity of these banks. They give away a free “call option” just to make it look like they have removed the CDO risk from their balance sheet. In reality it is still there though!
CDO replaced with Loan which has limited recourse to the same CDO