Merrill is getting whacked because, like other Wall Street firms, it plowed headlong into the market for complex fixed-income securities. When push came to shove and investors actually wanted to start selling these things, accurate prices couldn't be identified. The market had disappeared. Now, firms are struggling to get their arms around what these things are really worth -- and the answer is "a whole lot less than par."
Merrill also made what can only be considered a disastrous, poorly timed acquisition of subprime lender First Franklin late in 2006 for $1.3 billion. At the time, this is what the firm had to say about it:
"These leading mortgage origination and servicing franchises will add scale to our platform and create meaningful synergies with our securitization and trading operations," said Dow Kim, president of Merrill Lynch's Global Markets & Investment Banking Group. "This transaction accelerates our vertical integration in mortgages, complementing the three other acquisitions we have made in this area and enhancing our ability to drive growth and returns. We look forward to working with the experienced teams at these companies to serve their clients and leverage our broad range of mortgage products and services."
Ambac Financial Group Inc. s[: abk] said Wednesday that it swung to a third-quarter net loss of $360.6 million, or $3.51 a share, from a profit of $213.5 million, or $1.98 a share, a year earlier.
Ambac said the loss was due to the previously-announced unrealized loss on credit derivatives exposure of $743.4 million, which stemmed from the drop in market prices of collateralized debt obligations.
Excluding the impact of this loss, operating earnings slipped 2% to $1.88 a share, matching analyst expectations according to a survey by Thomson Financial.
LOL!
Good to know that they insure 175 billion ( over $ 500 billion in total) in structured finance including
Direct sub-prime RMBS exposure totals $8.8 billion; $1.6 billion is 2006/07
vintage
CDO ( total over $ 70 billion )of ABS with >25% MBS exposure totals $29.2 billion; $26.2 billion - CDO of high-grade and $3 billion mezzanine
Needless to say that their bond insurance is rated AAA at the same time their own bonds are rated close to junk or junk.....
Full Containment strikes again. Our next entertainment in the FC chronicles is up for grabs at this point. We may branch out to transports, but it seems such a diversion while so many great candidates still exist in finance and construction.
Noiminate your favorite candidate soon. Hey Kids! Get an FC coloring book at participating outlets near you! Don't forget to solve the puzzle inside for great prizes.
And nowhere in the article is the obligatory "Nobody could have foreseen" excuse. Maybe in today's conference call--let's make predictions. I'm guessing the line comes in at least two forms during the call.
They fessed up to $7.9B...lets call it $8B, after-all, what's a $100 MM between level 3 accounting friends. What this amount is, is the bare bones minimum that even under their level 3 subjective valuations could not be kept on the books at this time. There's alot more to come considering they are one of the largest CDO dealers on wall street. Alot more.
So the quarter ended on Sept 30, then on Oct 5 -- which is after Sept 30 -- Merril said they would have $5 billion in write downs for the already-ended quarter, and now less than three weeks later, it's $8 billion?
at least they havn´t the firepower to announce a big buyback to mask the debacle as companies usually do when they have to sell bad or ugly news.......
Merrill did what everybody else did - they hire and pay - well - managers who do nothing that every other money manager does not do. They simply buy what is marketed to them; they are not able to analyze or understand it. They could outsource that whole end of the business to those Indian guys who do the drive-thru orders at Macdonalds and get exactly the same results. In fact, in the best interests of their customers, they should do so.
Mortgage companies scrambling to ease the terms on thousands of loans destined for default may be doing more harm than good by rewarding investors and homeowners who took on excessive risk.
All the Bankrupters and Fraudsters of New York City (BFNYC) would be found to have been sinners. Never was any doubt. It is in their nature. They own the policing agencies lot more than the Mafia ever did.
yeah! this reminds me of that time i staggered into the confession box, exhausted and covered in blood thinking that it was all finally over, and i started talking and then out of nowhere a bullet zinged past my ear and my evil clone came bursting through the box dressed like a priest with a machine gun in his hands, but i knocked it away and there was a big dramatic fight:
punch, punch, kick, block, punch, kick Ack! Hey no hair pulling kicks him in the shin Ow! punch, punch, block, kick
BD's evil clone lying in a bloody heap on the floor
Bacon Dreamz - go a bit lighter on the coffee, okay?
The significant numbers on the EHS report are the average and median prices, which continued their slide. In every region, the average price is below the 2005 average. Only the NE managed to keep its median price in 2005 territory.
The implication this has for portfolio valuations is pretty massive.
OT question to banker or commentator familiar with banking:
Are banks limited to Fannie Mae or Freddie Mac Mortgage backed securities in their assets? That is to say, are they prohibited from buying, say, MBS issued by Morgan Stanley or some other packager of MBS? I saw somewhere that banks could not purchase bonds of companies, etc., but only government backed securities. Does this apply to MBS too?
Elvis asks:
My question, CR, is when do these billions become significant and have dramatic consequences for these financial companies?
I tried to calculate Merrill's book value and I got around 38 billion. A loss of about 8 billion takes some 20% out of that. So MER trades down about a dollar or so today? Sure. A 20% chunk out of your net worth is just a pin prick.
Merrill did what everybody else did - they hire and pay - well - managers who do nothing that every other money manager does not do. They simply buy what is marketed to them; they are not able to analyze or understand it. They could outsource that whole end of the business to those Indian guys who do the drive-thru orders at Macdonalds and get exactly the same results. In fact, in the best interests of their customers, they should do so.
Yeah I suspect there is little difference in smarts between the McDonald employees and the Merrill employees, but the two probably look very different. Merrill guys wear suits and look rich. Makes a big difference.
--
"Jas-Just curious if there are any assets you like, and if so, which ones (cash included)."
My middle name is Broken Clock! Since Jul'98 I have no changed my view an iota:
AVOID Scams!
US T-Bills and long-term Treasury STRIPS.
Gold
Swissie.
All are safety oriented. Except for avoiding Scams, because I am addicted to speculation and am loaded with Jan10 puts, mostly on Fraudentials and Hopebuilders, I practice what I preach.
A financial company with the corporate experience of Merrill Lynch should not have such poor risk management The page cannot be found . Investing in people with lousy credit is a bad business plan, a DECA student in a high school class could tell you that. Unless he steps down, Stan O'Neal's name is going to start being mentioned in the same breath as Charles Prince.
Merrill Lynch and all the big bankers and financiers are in one business and one business only to screw others, which include the shareholders. Their chieftains are running a negative sum game and their gains necessitate losses for others. Others gains are temporary (for few years). It is very important to understand the true nature of the players. We are dealing with born-and-bred crooks.
Does anyone know whether ML corporate controls are really that craptastic, or are they pulling a fast one?
If something like that happened at my firm, the only thing saving you would be the SVPs' heads exploding before they could chop you into little pieces for screwing up this bad.
The news here IMO, is not the absolute number. The news is the timing of the additional 40-50% over the October 5 announcement. How does that happen? If I were a MER investor, I'd be severely questioning both Stan O'Neal and the controls in place. He thought he had a handle on the writedown after the quarter had ended and was comfortable enough to put a number on it for the public. Three weeks later he's wrong by 40%+?
Wall Street analysts now question the validity of Goldman's report. The reply from Goldman's spoke person was rather defensive and hostile. (There was a Bloomberg link on this exchange that unfortunately I don't have now). That's why I raised the question in earlier post about their strategies in dealing with CDO's and other MBS'. My belief is there are still some skeletons in the closets that have not come out, and this only adds to more market uncertainty and volatility.
What, surely the jokers at Goldchain Silverknife wouldn't be lying and just making up numbers so they can get big bonuses? Heavens, that couldn't be, could it? Haha...
I have no expertise in this area, and absolutely no inside information, but my guess is that the increase in ML's writedown was not due to a breakdown in their internal control systems, but rather the result of an unexpected disagreement with their auditors about some of the accounting judgments underlying the numbers. Post Enron, the big auditing firms are looking out for number one, which sometimes leads them to change their minds about the proper application of GAAP in certain situations, which then leads to unanticipated disagreements with corporate clients.
Of course, even my guess is right, this isn't an excuse for ML management. ML should have made sure it had buy-in from its auditors before announcing its quarterly results. I agree with you, a change of this magnitude in previously reported figures is shocking.
Merrill is getting whacked because, like other Wall Street firms, it plowed headlong into the market for complex fixed-income securities. When push came to shove and investors actually wanted to start selling these things, accurate prices couldn't be identified. The market had disappeared. Now, firms are struggling to get their arms around what these things are really worth -- and the answer is "a whole lot less than par."
Merrill also made what can only be considered a disastrous, poorly timed acquisition of subprime lender First Franklin late in 2006 for $1.3 billion. At the time, this is what the firm had to say about it:
"These leading mortgage origination and servicing franchises will add scale to our platform and create meaningful synergies with our securitization and trading operations," said Dow Kim, president of Merrill Lynch's Global Markets & Investment Banking Group. "This transaction accelerates our vertical integration in mortgages, complementing the three other acquisitions we have made in this area and enhancing our ability to drive growth and returns. We look forward to working with the experienced teams at these companies to serve their clients and leverage our broad range of mortgage products and services."
Er ... not so much.
Conspiracy of Fools strikes again! If Merrill had just created a really big SIV Conduit Contraption- this could've all been avoided.
Moin from Germany,
here is another report that is probably getting very few headlines today.
Another good example of how to report earnings ex doing cost of business/losses/expenses
AMBAC Style
Ambac - Investor Relations - News Release
Ambac Financial Group Inc. s[: abk] said Wednesday that it swung to a third-quarter net loss of $360.6 million, or $3.51 a share, from a profit of $213.5 million, or $1.98 a share, a year earlier.
Ambac said the loss was due to the previously-announced unrealized loss on credit derivatives exposure of $743.4 million, which stemmed from the drop in market prices of collateralized debt obligations.
Excluding the impact of this loss, operating earnings slipped 2% to $1.88 a share, matching analyst expectations according to a survey by Thomson Financial.
LOL!
Good to know that they insure 175 billion ( over $ 500 billion in total) in structured finance including
Direct sub-prime RMBS exposure totals $8.8 billion; $1.6 billion is 2006/07
vintage
CDO ( total over $ 70 billion )of ABS with >25% MBS exposure totals $29.2 billion; $26.2 billion - CDO of high-grade and $3 billion mezzanine
Needless to say that their bond insurance is rated AAA at the same time their own bonds are rated close to junk or junk.....
The alchemy of finance at work..
My question, CR, is when do these billions become significant and have dramatic consequences for these financial companies?
Well, heh heh, turns out $5bn was, hmmmm, uh, optimistic.
Oooopsie?
Full Containment strikes again. Our next entertainment in the FC chronicles is up for grabs at this point. We may branch out to transports, but it seems such a diversion while so many great candidates still exist in finance and construction.
Noiminate your favorite candidate soon. Hey Kids! Get an FC coloring book at participating outlets near you! Don't forget to solve the puzzle inside for great prizes.
And nowhere in the article is the obligatory "Nobody could have foreseen" excuse. Maybe in today's conference call--let's make predictions. I'm guessing the line comes in at least two forms during the call.
Anybody want the over?
They fessed up to $7.9B...lets call it $8B, after-all, what's a $100 MM between level 3 accounting friends. What this amount is, is the bare bones minimum that even under their level 3 subjective valuations could not be kept on the books at this time. There's alot more to come considering they are one of the largest CDO dealers on wall street. Alot more.
So the quarter ended on Sept 30, then on Oct 5 -- which is after Sept 30 -- Merril said they would have $5 billion in write downs for the already-ended quarter, and now less than three weeks later, it's $8 billion?
Interesting.
Moin again,
at least they havn´t the firepower to announce a big buyback to mask the debacle as companies usually do when they have to sell bad or ugly news.......
Well, heh heh, turns out $5bn was, hmmmm, uh, optimistic.
How else were the insiders going to be able to cash out on the bounce. You would want to let everyone know before the earning release would you?
Merrill did what everybody else did - they hire and pay - well - managers who do nothing that every other money manager does not do. They simply buy what is marketed to them; they are not able to analyze or understand it. They could outsource that whole end of the business to those Indian guys who do the drive-thru orders at Macdonalds and get exactly the same results. In fact, in the best interests of their customers, they should do so.
"Revenue, after factoring in some of its losses, fell 94 percent to $577 million from $9.83 billion a year earlier."
When Ford has a better year than you, you've got a problem.
OT: Popular mortgage "mods" fuel moral hazard
Popular mortgage mods fuel moral hazard
| Reuters
Mortgage companies scrambling to ease the terms on thousands of loans destined for default may be doing more harm than good by rewarding investors and homeowners who took on excessive risk.
Someone out there been reading CR ?
I like the headline from the FT
"Merrill Lynched"......
OH MY, this is just unbelievable. 7.9B! That's a whole lot of scratch.
Is it gonna get worse? We still don't know.
--
Fraud is unraveling, slowly but surely.
All the Bankrupters and Fraudsters of New York City (BFNYC) would be found to have been sinners. Never was any doubt. It is in their nature. They own the policing agencies lot more than the Mafia ever did.
Jas
Talk about a shocking visit to the confessional!
yeah! this reminds me of that time i staggered into the confession box, exhausted and covered in blood thinking that it was all finally over, and i started talking and then out of nowhere a bullet zinged past my ear and my evil clone came bursting through the box dressed like a priest with a machine gun in his hands, but i knocked it away and there was a big dramatic fight:
punch, punch, kick, block, punch, kick Ack! Hey no hair pulling kicks him in the shin Ow! punch, punch, block, kick
BD's evil clone lying in a bloody heap on the floor
...or was it the evil clone?
dum dum DUM!!!
Things will get even more interesting if the M-LEC bailout doesn't float. Citibank's next trip to the confessional could easily be $20bio+.
--
Existing Home Sales down 8.0% to 5.04M. Pretty close to my 5.0M forcast. Prices down 4.2% YoY.
Jas
A bombshell like this, and MER is down just 1%. That extra $4bn or so must have been priced in already.
So the drum beat gets louder for a 50bp cut on 10/31.
One question what would have MER's write down looked like without the last 50bp (i get by with a little help from the fed)cut?
Is the ice cracking?
--
"So the drum beat gets louder for a 50bp cut on 10/31."
That would confirm the recession and the path to depression. The crooks have done the dirty deed to the American People.
Jas
CFC is tanking ... now down to 14$
--
Biggest MoM decline in EHS ever seen, as per CNBC.
Jas
Jas-
Just curious if there are any assets you like, and if so, which ones (cash included).
Can Merril force others to confess as well through Margin calls..?
Holy cow, that EHS report is awful. On top of MER . . . then we have what, two HBs reportingf today and CFC Friday?
Today's a day I'm glad to be out of the market.
<i>
\tCFC is tanking ... now down to 14$</i>
So, how do you short a stock? Do you have to own it first? Can you short on margin?
Bacon Dreamz - go a bit lighter on the coffee, okay?
The significant numbers on the EHS report are the average and median prices, which continued their slide. In every region, the average price is below the 2005 average. Only the NE managed to keep its median price in 2005 territory.
The implication this has for portfolio valuations is pretty massive.
bacon dreamz, i was thinking you've been watching too much Family Guy
Bloomberg now has it as an $8.4B writedown?
I'm afraid to look again, as it seems to go up by the hour.
"So, how do you short a stock? Do you have to own it first? Can you short on margin?"
I am short the the
KBW Mortgage Finance Index
( via Germany)
I think it is not prudent to speculate on margin.....
OT question to banker or commentator familiar with banking:
Are banks limited to Fannie Mae or Freddie Mac Mortgage backed securities in their assets? That is to say, are they prohibited from buying, say, MBS issued by Morgan Stanley or some other packager of MBS? I saw somewhere that banks could not purchase bonds of companies, etc., but only government backed securities. Does this apply to MBS too?
Elvis asks:
My question, CR, is when do these billions become significant and have dramatic consequences for these financial companies?
I tried to calculate Merrill's book value and I got around 38 billion. A loss of about 8 billion takes some 20% out of that. So MER trades down about a dollar or so today? Sure. A 20% chunk out of your net worth is just a pin prick.
Gamma asks what asset class one likes.
I liked Chinese stocks in 2004/5. Now it's a bit late. There may still be some Russian stocks worth a look.
Merrill did what everybody else did - they hire and pay - well - managers who do nothing that every other money manager does not do. They simply buy what is marketed to them; they are not able to analyze or understand it. They could outsource that whole end of the business to those Indian guys who do the drive-thru orders at Macdonalds and get exactly the same results. In fact, in the best interests of their customers, they should do so.
Yeah I suspect there is little difference in smarts between the McDonald employees and the Merrill employees, but the two probably look very different. Merrill guys wear suits and look rich. Makes a big difference.
Why do I keep hearing the wrong-answer buzzer from "The Price Is Right" and "Match Game '73"?
Oh look, big fires in California on CNN.
Not as big as 03, but still...
--
"Jas-Just curious if there are any assets you like, and if so, which ones (cash included)."
My middle name is Broken Clock! Since Jul'98 I have no changed my view an iota:
All are safety oriented. Except for avoiding Scams, because I am addicted to speculation and am loaded with Jan10 puts, mostly on Fraudentials and Hopebuilders, I practice what I preach.
Jas
A financial company with the corporate experience of Merrill Lynch should not have such poor risk management The page cannot be found . Investing in people with lousy credit is a bad business plan, a DECA student in a high school class could tell you that. Unless he steps down, Stan O'Neal's name is going to start being mentioned in the same breath as Charles Prince.
--
Seth,
Merrill Lynch and all the big bankers and financiers are in one business and one business only to screw others, which include the shareholders. Their chieftains are running a negative sum game and their gains necessitate losses for others. Others gains are temporary (for few years). It is very important to understand the true nature of the players. We are dealing with born-and-bred crooks.
Jas
"create meaningful synergies with our securitization and trading operations,"
Synergy works both ways. Lovely concept indeed...
Does anyone know whether ML corporate controls are really that craptastic, or are they pulling a fast one?
If something like that happened at my firm, the only thing saving you would be the SVPs' heads exploding before they could chop you into little pieces for screwing up this bad.
Missing from the CR Confessional are 2 big IB's:
. Goldman Sach
. Lehman Bros
I wonder how they can hide the loss when all their peers have come out and confess. What are their strategies? can't wait!
Well, to put things in perspective, for ML the 8.4 Billion is 2.82 per share. Shares are trading at 63.25 right now and market cap is about 53 BN.
Rich,
The news here IMO, is not the absolute number. The news is the timing of the additional 40-50% over the October 5 announcement. How does that happen? If I were a MER investor, I'd be severely questioning both Stan O'Neal and the controls in place. He thought he had a handle on the writedown after the quarter had ended and was comfortable enough to put a number on it for the public. Three weeks later he's wrong by 40%+?
Simply not acceptable.
Anon,
Goldman had a huge up quarter.
http://lnbnf12:8080/wiki/Wiki.jsp?page=DataAdminPages Weren't a lot of the profits on markups on Level 3 assets?
Goldman had a huge up quarter.try2: Weren't a lot of the profits on markups on Level 3 assets?
Robert,
Here ya go!
http://www2.goldmansachs.com/our_firm/investor_relations/financial_reports/docs/earnings/3Q07_Earnings_Release_-_EXTERNAL.pdf
Banker,
Wall Street analysts now question the validity of Goldman's report. The reply from Goldman's spoke person was rather defensive and hostile. (There was a Bloomberg link on this exchange that unfortunately I don't have now). That's why I raised the question in earlier post about their strategies in dealing with CDO's and other MBS'. My belief is there are still some skeletons in the closets that have not come out, and this only adds to more market uncertainty and volatility.
What, surely the jokers at Goldchain Silverknife wouldn't be lying and just making up numbers so they can get big bonuses? Heavens, that couldn't be, could it? Haha...
Banker,
I have no expertise in this area, and absolutely no inside information, but my guess is that the increase in ML's writedown was not due to a breakdown in their internal control systems, but rather the result of an unexpected disagreement with their auditors about some of the accounting judgments underlying the numbers. Post Enron, the big auditing firms are looking out for number one, which sometimes leads them to change their minds about the proper application of GAAP in certain situations, which then leads to unanticipated disagreements with corporate clients.
Of course, even my guess is right, this isn't an excuse for ML management. ML should have made sure it had buy-in from its auditors before announcing its quarterly results. I agree with you, a change of this magnitude in previously reported figures is shocking.
Phil
Phil,
That's a great insight, thank you!
It's just that damn dog again. He got into the money and ate up a whole bunch of it. Oops.