Merrill's $5.7B Write-Down, $8.5B Share Issuance
I'm on an earlier than usual train home today, to take the missus out to dinner (she just flew back into NY today). Change at Jamaica, bump into a Natexis derivative trader I know from my old neighborhood. Our train comes, I sit with him, along with his pals from Merrill.
We are talking cars when one of the Merrill guys' Blackberry goes off. He is a CDO manager, and he just got the IM that the big press release just hit the tape. The news about the write down and the new stock issuance is now public. He tells us about it -- Write-Down = $5.7B; Share Issuance = $8.5B -- and we all start talking about it.
My (naive) question: "Wait a second -- didn't Merrill just report last week? How did they not disclose a $5.7 billion dollar whackage?"
Merrill guy's by-the-book-answer: "Earnings were the 17th; The decision had not yet been made to sell the ABS CDOs, or take the writedown, or issue more stock. That was done this week."
I think: "yeah, sure it was." Frickin weasels.
Other Merrill guy says: "Geez, the stock is gonna get hit tomorrow" (ya think?) The stock closed Monday at $24.33, down 55% year-to-date.
Merrill woman: "When do we buy this?"
CDO guy: "When it hits $15"
Me: Ouch!
~~~
The Merrill announcement raises a lot of questions. Investors should be asking questions. If the SEC wasn't so busy chasing rumors, squeezing shorts, and otherwise wasting taxpayer money -- but not protecting shareholders -- they might consider some of the following questions also:
1. Why did Merrill fail to disclose this write-down to shareholders when they reported on July 17th? The stock was $30.73 then; everyone who bought since then just got totally sandbagged.
2. The Financials -- especially Merrill -- traded today as if many people knew this was coming. How much non-public information leaked in advance of this announcement? (Isn't non-public material inside information something the SEC used to care about?)
3. Who really thinks the worst of the write-downs, share issuance, and dilution is behind us? Anyone? Bueller? (These CDOs were vintage 2005. That means we have 06 and 07 yet to go).
4. Anyone think Financials are cheap? You cannot trust the "E," and the "P" is obviously subject to change. Think they might get cheaper?
5. Who really thinks the Financials have put in a bottom?
There is no doubt as to who foisted these losses on Merrill: Rumor-mongers, Short-sellers, and al-Qaeda. Management obviously had nothing to do with this. Hence, the SEC should be spending most of its budget, manpower, and time investigating those issues.
To say I am disgusted is an understatement. The SEC's priorities are warped, they have become an embarrassing paper tiger, and a national disgrace. SEC chairman (let's call him "Ken") better grow a pair and start thinking about that small class of his constituency known as shareholders.
Watch for the same old crowd of bottom callers, and for this to somehow be spun positively . . .
>
Sources:
Merrill Lynch Announces Substantial Sale of U.S. ABS CDOs, Exposure Reduction of $11.1 Billion
Merrill Lynch Press Release, Monday July 28, 5:25 pm ET
http://biz.yahoo.com/bw/080728/20080728006329.html?.v=1
Merrill Has $5.7 Billion of Writedowns, Sells Shares
Bradley Keoun and Christine
Bloomberg, July 28 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=atJvwvpRd6B8&
Merrill Aims to Raise Billions More
SUSANNE CRAIG and RANDALL SMITH
WSJ, July 29, 2008
http://online.wsj.com/article/SB121728170968391097.html
Merrill Posts Another Loss; Write-Downs Keep Coming
SUSANNE CRAIG and RANDALL SMITH
July 18, 2008; Page C1
http://online.wsj.com/article/SB121631561599262531.html
Tuesday, July 29, 2008 | 06:00 AM | Permalink
| Comments (72)
| TrackBack (0)
add to de.li.cious | 
digg this! | 
add to technorati | 
email this post
TrackBack
TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c52a953ef00e553bfc4e08833
Listed below are links to weblogs that reference Merrill's $5.7B Write-Down, $8.5B Share Issuance:
Comments
Big shocker. How can we believe ANY of the earnings reports of the financials at this point?
I have three letters for you: SKF. Financials are going down, down, down.......
Posted by: Jeff | Jul 28, 2008 9:40:50 PM
If Thain knew, then he fraudulently represented the state of the company.
If he didn't know, then he lacks a crystal ball that can see a week into the future in his own company.
Either way, he should be keel-hauled by the stockholders.
Posted by: JP | Jul 28, 2008 9:53:05 PM
Down 11% prior to the announcement.
Who still thinks the market is fair?
Posted by: Doug | Jul 28, 2008 9:53:27 PM
my former office mate has a t-shirt that sums it up nicely:
fuck the fucking fuckers
Posted by: a guy called john | Jul 28, 2008 10:03:16 PM
How can Thain be keel-hauled by the stockholders? I imagine most of them are thankful they have any money left at all!
Posted by: Patrick | Jul 28, 2008 10:04:44 PM
Don't cry for Thain. His compensation package coming in the door at Merrill was/is ludicrous. I think he'll be just fine either way. Merrill's shareholders on the other hand......
Posted by: Jeff | Jul 28, 2008 10:04:48 PM
I doubt this complicated deal, and it's ramifications, went from idea to consumation so quickly. This took a lot of lawyering--and deal breaking/fixing. If not, the fire sale is taking place before the coming final fire.
Posted by: Mel | Jul 28, 2008 10:04:50 PM
> The decision had not yet been made
Granted the actual decision may not have been made.
However, IMHO and it will take a lot to change my opinion, the mere discussion of such a MATERIAL EVENT should have been disclosed when they reported. It is a sgnificant issue that shareholders should know of. Look at the items in the boilerplate in the annual report, how is this less important?
In my opinion, ML management has abdicated their responsibilites. IMO, ML BoD has abdicated their responsibilites to the shareholders, playing word games instead of reporting responsibly.
Posted by: Bob | Jul 28, 2008 10:06:32 PM
Wonder of Cox and the SEC will investigate this to do their JOB and protect shareholders? (the sound of crickets chirping in the background) I thought not.
Posted by: Jeff | Jul 28, 2008 10:11:35 PM
Wasn't the one difference the Australian bank who took massive writedowns last week, which has forced a cascade of new writedowns, which in this case includes Merril?
But the stock traded today consistently down, so it sure looked like somebody had some usable intel. Too bad the SEC will never get around to them.
Posted by: Chief Tomahawk | Jul 28, 2008 10:13:30 PM
Paper on top of paper on top of paper. God help us if the FCB's ever start to balk. Additional $26b to be issued this week.
Posted by: equtz | Jul 28, 2008 10:19:52 PM
BR, first to answer your rhetorical questions:
The worst is still ahead of us, not behind us.
Financials are not cheap, as worst is still to come.
Financials have not hit a bottom, the worst is still to come.
Now, with that out of the way, the worst part is the insult to the intelligence of even the most basic of investors that such a decision had not been made on the 17th.
When a (former stalwart) firm like ML begins playing these kinds of games with the investing public, it is a sure sign that all integrity and credibility has vanished from Wall Street.
What ML doesn't realize is that continued loss of credibility and integrity impacts their and the sector's future far worse than had they announced all of this on the 17th. Who can trust the status of ANY player in the space now??
Once investors determine Wall Street can not be trusted, it is lights out. Simple as that.
I believe that is happening right now. This may have been the straw that broke the camel's back.
Beyond shameful, this is outright embarrassing for the entire US market. Not only are the underlying fundamentals a disaster, now we have boards and management teams playing dumb over $5.7 Billion.
Look for these guys to appear on the next episode of "America's dumbest criminals".
I swear on my eyes that my 6-year old twins could have hatched a better "we didn't know" plan than this.
What happened to Wall Street? What happened to America? Fargin disaster.
Canadians used to cower in the shadow of our neighbor. Now, it looks like a classic tortoise and hare race.
Look north fellow investors. We've got commodities and integrity "a plenty".
Regards,
The Greek
Posted by: AGORACOM - George | Jul 28, 2008 10:23:00 PM
And you've (Canadians) got free health care......
Posted by: Jeff | Jul 28, 2008 10:26:29 PM
Is it such a slam dunk that MER shares will fall???
I guess just short it under the prior lows...
Off topic: SIRI is the worst stock ever!!!
Posted by: SINGER | Jul 28, 2008 10:26:42 PM
Ugly Details...
approx 365 mil shares. but hey don't worry management buying 750k!
raise 8.5B plus 1.3B overallotment that I am sure will be fully allocated.. So 9.8B
but..
write down 5.7B on CDO's. Sold CDO's to lonestar for 6.7B. These were valued at 11.1B just at the end of the last quarter. Almost 40% loss in the last month. Purchase 75% financied by MER.
Temasek buys 3.4B in stock but they are getting 2.5B of that for free in exchange for giving up the rachet provision they negotiated in the last offering.
Various other writedowns on hedge credit risks:1.3B
Nice Job MER stockholders!!!
You just sold about 36% of your company for 300 million in net proceeds. Gotta pay the bonuses after all.
Posted by: Vermont Trader | Jul 28, 2008 10:33:09 PM
It's mystifying why people aren't screaming for Thain's head. He just told the whole frickin' world several times within the past month or two that they don't need any more capital. Anybody who believes they didn't know about these losses on the 17th, is an utter fool and deserves to be parted with their money. The corruption these bastards are getting away with is absolutely astonishing. One of these days, they're going to piss off the wrong person. Maybe they have, they just don't know it yet.
Posted by: Stuart | Jul 28, 2008 10:34:51 PM
Do they get off in Rye, Port Chester, Stamford, Darien, or New Canaan?
Posted by: taylor118 | Jul 28, 2008 10:39:24 PM
I calculate Merrill write-downs at a little over $40B to date...
Think they have a few more in them?
Posted by: Jake | Jul 28, 2008 10:39:32 PM
How many months before Yahoo Finance lights up with plaintiff's lawyers press releases looking for a lead plaintiff to sue MER? LOL.
I feel like Enron and Tyco were yesterday. The message is clear: traders (no pun intended) get rich; shareholders get screwed.
Posted by: D.H. | Jul 28, 2008 10:40:13 PM
I'm not sure why everyone has such pity for the stockholders. I mean they have legal rights so go ahead and sue or whatever but last I checked an incredibly obvious sign that things were fucked came no later than ONE YEAR ago (almost to the week now). Previous to that there were not so front-page but equally obvious signs in FEBRUARY---1.5 year ago. Previous to that there were hints in 2005 of what was to come.
I mean c'mon, it was plain as day in August of last year, and on top of that, in the following weeks we had a huge bounce back to new highs to give you every opportunity to unload your shares.
Sorry that people got burned but I find it hard to believe that the supposed victims, the mythical stockholders, weren't just being purposefully obstinate as long as their paychecks and bonuses kept rolling in and the stock kept rising. It's a two way street, oh you bastions of capitalism, you.
As for those who just didn't realize---well, you do have some sympathy from me.
Posted by: Patrick | Jul 28, 2008 10:43:39 PM
Why does Barry and other assume the SEC will not investigate this and if crimes were committed prosecute the perps?
On the face of it this announcement makes todays trading looks crooked. But it may not be.
Could today's price decline been due to Merrill telling large institutional investors, those holding convertable preferreds as well as common, that those preferreds were going to converted to common? I think notice is due them before this kind of move takes place. Does notifying the preferred holders satisfy the requirement for public disclosure of such a move?
And if they learn that they are soon going to own a lot more common stock than what they feel comfortable with then naturally they would sell some common shares today while waiting for the preferreds to convert to common tommorrow.
At the least some kind of quick SEC review is needed to assure the public this was above board or to announce further investigation will take place.
Posted by: ken | Jul 28, 2008 10:45:07 PM
I agree with all of Barry's comments; but with that said, MER will likely close green tomorrow.
There is never any good news, so rallies must happen on the back of items that market participants may think will be the worst of news. I'm not saying that I think this is the worst news we will see, but it may be bad enough that traders think that this kitchen sink will be the last one they are with.
Who knows, maybe they aren't that dumb. They probably are though.
Posted by: jason | Jul 28, 2008 10:47:28 PM
re: Recession
Paul Kasriel is at the top of his game today. The charts on corporate profits are not to be missed:
http://web-xp2a-pws.ntrs.com/content//media/attachment/data/econ_research/0807/document/dd072808.pdf
Posted by: fred | Jul 28, 2008 10:48:03 PM
I agree with all of Barry's comments; but with that said, MER will likely close green tomorrow.
There is never any good news, so rallies must happen on the back of items that market participants may think will be the worst of news. I'm not saying that I think this is the worst news we will see, but it may be bad enough that traders think that this kitchen sink will be the last one they are with.
Who knows, maybe they aren't that dumb. They probably are though.
Posted by: jason | Jul 28, 2008 10:48:25 PM
CNBC better not spin this as positive tomorrow cause every forum/blog/comment section is raking MER over the coals over this and those people are pissed. Some are so pissed CNBC better line its foyer with titanium if it tries to spin it. Am sensing Joe public is nearing the saturation point with this shit. Where are the cops for god sakes.
Posted by: Stuart | Jul 28, 2008 10:50:57 PM
