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 . . .


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

Merrill Has $5.7 Billion of Writedowns, Sells Shares
Bradley Keoun and Christine
Bloomberg, July 28 2008

Merrill Aims to Raise Billions More
WSJ, July 29, 2008

Merrill Posts Another Loss; Write-Downs Keep Coming
July 18, 2008; Page C1

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