"Merrill Lynch has agreed to pay Temasek $2.5 billion, 100% of which Temasek has contractually agreed to invest in the offering at the public offering price"
How does MER raise money? They just printed up about 102M shares of stock and gave them to Temasek.
Methinks someone dropped acid AND shrooms at the same time, waited an hour, then started calculatin'.
This whole deal seems like a hide the bad debt scheeme. What is this? Level4 assets.
I'd say that this is a measure of how darned quickly ML's position fell apart. I feel stupid for being so amazed. It sounds like they believed their own press releases.
The only reason I can see Temasek taking this deal is to take over the company and then throw everyone out the door. From there, they put their own people in and start over.
CR, I get the hard money and "can't wait" business. But the extent to which they need it is breathtaking. The most favorable interpretation is that they expect their stock to drop 30% in the next 6 months. If they actually need the cash now, then their debt should be below investment grade. WAY below.
The only reason I can see Temasek taking this deal is to take over the company and then throw everyone out the door. From there, they put their own people in and start over.
How? As holders of common, they are first in line to be thrown to the lions.
The SEC filing says Temasek paid $4.4 billion for Merrill stock at $48/share. Meaning they bought 91.67 million shares.
Merrill has to "to compensate Purchaser for the aggregate excess amount per share paid by Purchaser". They are compensating Temasek to the tune of $2.5B. $2.5B divided by 91.67M equals $27.27/share "excess" that Temasek paid.
So this new offering is going through at $20.73/share. Maybe.
OT: A person asked why his gold stocks in a small cap company he owns has stayed around the same price even though gold has rocketed during the same time frame. Companies use a term called "Feeding the Ducks" where when the ducks start quacking (investors) they get feed (print more stock certificates). This guy did not understand that if a company prints more stock that the shares are diluted. This was at a conference of high net worth investors!!!
Why isn't the CDO sale effectively an off-balance sheet transaction? ML is financing the sale -- and if they buyer fails to repay the loan, ML can only go after the assets -- the CDOs themselves -- which presumably would have fallen in value in this case. It appears to me that this structure doesn't really put the CDOs outside ML. In the worst case where the value of the CDOs collapses beyond the current discount, it would appear that the buyer would default on the loan and ML would be forced to pull the CDOs back on its books?
From ML's press releases regarding the CDO sale: Merrill Lynch will provide financing to the purchaser for approximately 75 percent of the purchase price. The recourse on this loan will be limited to the assets of the purchaser. The purchaser will not own any assets other than those sold pursuant to this transaction. The transaction is expected to close within 60 days.
So $2.5 goes to Temasek, and $2.4 in "additional dividends" goes to preferred shareholders. The net capital at the end of the day would seem to just be $3.6 billion raised.
But $8.5 billion in new shares issued! So the common stockholders massively diluted, with only $3.6 billion in new capital to show for it. All on a day when $5.7 in new writedowns announced.
I must feel great to be a MER shareholder tonight.
Forget MaxedOutMama, she is nothing but an ideologue packaged in fancy language. Just check outat her oil calls two and three years ago and see how terribly wrong she was then.
Her ideology overrides all reason and even comprehension. She is an utter waste of time.
As of June 27, it said it had exposures of $33.7 billion to U.S. prime mortgages, $1.01 billion to U.S. subprime mortgages, $1.54 billion to "Alt-A" mortgages and $7.45 billion to non- U.S. residential mortgages.
William Smith, president of Smith Asset Management Inc in New York, said Merrill fetched a "horrendous" price for the CDOs.
"The problem here is with Thain. You can throw him into the credibility problem camp now," Smith said. "It's tough to call the bottoms on these things because it seems like it's never ending, but this could be viewed as the watershed."
Temasek was not immediately available for comment.
"The company claimed in 2008 that it is not a sovereign wealth fund, with its spokesman saying the company "has to sell assets to raise cash for new investments and doesn't require the government to give approvals"[2]. Temasek was able to be excluded from an agreement between Singapore and the United States requiring greater disclosure and transparency in transactions involving sovereign wealth funds, which included the Government of Singapore Investment Corporation (GIC), claiming it "already meets disclosure guidelines" and provides more details than sovereign wealth funds. There has been no public suggestion that the Singapore Government's granting of military facilities for the US Armed forces influenced the United States in its decision on this matter."
"Merrill said it would finance about 75% of the value of the deal. Other banks with toxic assets have taken similar action, in their quest to find someone to take the assets off their hands. Despite the steep discount, Merrill's sale may bode well for other firms on Wall Street such as Lehman Brothers Holdings Inc. that are also sitting on hard-to-sell assets."
Why would it "bode well" for anyone else that Merrill took a steep discount and had to finance 75% of the sale on a non-recourse, carryback basis? Sounds like it's just the opposite.
I can't even believe that ANYONE would, at this point, toss any money at MER. How much lying can one guy do (Thain) before everyone just lets them die? The management has stood up and mis-represented the state of the company at every turn. When is this actionable?
There are two choices here: Thain and management knew the state of the company and were outright lying, or they didn't know and told the truth. One is just as bad as the other, except one should be a legal case.
This is just getting stoopider and stoopider. Anyone that buys even one share of this offer deserves to lose everything. The company should just die and serve as a warning to others.
Retail MER common holders/purchasers have been systematically abused over the past 3 trading sessions. Is there reason to believe the news of this deal might have enriched a few that got an advance peek ? Appears that way.
Should do a lot to instill confidence in the equities markets!
Temasek buys 3.4B in stock but they are getting 2.5B of that for free in exchange for giving up the rachet provision in the last offering.
36% dillution..
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.
Should do a lot to instill confidence in the equities markets!
What fraction of idiots is going to see this as good news tomorrow? I mean all the bad news is out now. (And this time we really really really mean it.)
BTW, I'm offering no dividend shares in brain cell #3. Sure it's a bit flakey, and may not make out the year, but if I can find an SWF to buy said shares, you guys could short the hell out of it.
Misean, in order for them to toss stock, someone has to participate in the offer. Crickets should chirp and Temasek, if there were one fucntioning brain cell in the organization, would say "here's what you owe us to do this deal, have a nice day". somewhere around 3.7B is needed in addtional investment to make this deal happen.
Another Saturday night workin' on my new hobby
Looting the future so the pigmen get paid
Better be glad I've got just six months left
You're in an awful way!
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.
I guess we're finding out the mark of these assets, aren't we? Which means that you should look at each IB and mark down what they are telling you they are holding accordingly. What does that do to Goldman's level 3's? And, btw, this wasn't in the last month. This is what they were worth even then, they just lied about that too, or their models are worth shit. Again, two choices: they are completely stupid and don't deserve to be saved, or they are criminal. Take your pick.
Merrill Lynch (NYSE: MER) today reported a net loss from continuing operations for the second quarter of 2008 of $4.6 billion, or $4.95 per diluted share, compared to net earnings from continuing operations of $2.0 billion, or $2.10 per diluted share, for the second quarter of 2007. Merrill Lynch's net loss for the second quarter of 2008 was $4.7 billion, or $4.97 per diluted share, compared to net earnings of $2.1 billion, or $2.24 per diluted share, for the year-ago quarter. Second quarter 2008 results included a restructuring charge of $445 million pre-tax ($286 million after-tax) arising from headcount reductions completed during the quarter."
Doesn't all of this make their stock worth less than toilet paper used to clean diarrhea?
It just keeps getting worst. The term that goes through my head is fiancing death spiral. Each time they get more financing, I am sure that the next person will want the same purchase price protection. Also, does this prevent Lone Star from shorting the stock?
Here is my throught. If they force the stock down by shorting the stock or lending out the stock for shorting (even better as they get paid but don't actually sell the asset which may trigger some legal issues), they could be making a profit by the shorting as well as the price protection. Interesting thought.
Price Reset
\tSubject to certain conditions and exceptions, if the Company sells or agrees to sell more than $1bn of any common stock (or equity securities convertible into common stock) within one year of closing at a purchase, conversion or reference price per share less than $52.40, then the conversion ratio for the preferred stock shall be adjusted to compensate the investor on a full-ratchet basis.
Mandatorily convertible 2.4bn is a reset cash outflow on top of the 2.5bn.
Here's the 8k filing from Jan 16th. EX-3.9 & 4.8
My favorite: Right now we believe that we are in a very comfortable spot in terms of our capital." (July 17, 2008 -- Thain on a conference call after posting Merrill's second-quarter results)
"Crickets should chirp and Temasek, if there were one fucntioning brain cell in the organization, would say "here's what you owe us to do this deal, have a nice day"."
JP, i know and from where I sit, that statement is criminal. You cannot tell me for one second that this guy had no idea what the loss was going to be on July 17. I know what NEXT quarter's profit/loss will likely be at my place months before it happens. You have to be a complete idiot not to know where everything is heading. The CFO reports weekly everywhere.
This is just kabuki of the absurd. All of these should just go down and let the market clear. THAT'S how to get this over with, not by propping up things endlessly.
Did anyone notice that Merrill's stock was down 10% today? Of course, the announcement of this debacle didn't come until after the closing bell. Who do you think was tipped off early?
Mostly these facts are business history from the Wall Street Journal but there may be a smattering of tales out of school. The Bass Brothers were initial distress investors in the S&L crisis. Bonderman and Coulter (now TCP partners) were part of the team and so was the guy or team that is now Lone Star( his name escapes me at the moment). The Bass Brothers bought American Savings and the team ran it. They were (and are) great businessmen. My perception is they made a ton of money on American which ultimately turned into WaMu through a variety of mergers.
The Bass brothers cashed out pretty early in the American investment and generally promised themselves they would never again invest in such a regulated an entity as a Bank. Bonderman and Coulter on the other hand, liked the businessso there was a gentle and amicable separation of the ways. Although I suspect they still invest along with each other from time to time to this day.
It seems to me that both TCP and LoneStar, since they matured in the distressed debt environment of the American days, are jumping the gun and investing to early.
TCP with WaMu (less due diligence, since they know the management from years ago) and also symptomised with their now broken discussions with HBOS in England.
Lone Star with this Merrill deal.
First, here is how I perceive the accounting. Merrill sells at $6.7 Billion taking the write down of 4.4 billion from the mark-to-model value last month of 11.1 billion.
Lone Star comes to the table with 25% of 6.7 Billion or 1.675 Billion. This is the first loss position ( like JPMorgan in the Bear financing). This is so, because it is a non recourse loan (similar to commercial real estate construction loan of say a shopping mall). Non Recourse means the lender can only look to collateral for reimbursement and not the credit or other assets of the borrower. Hence the shell corporation borrower (affiliate of Lone Star) as the Purchaser of the Assets and borrower. In the event of a default by the borrower shellMerrill has no one of any financial substance to sue. It can only take the collateral.
Why does Merrill do this? I speculate that they can account for it-- as a new loan-- without write-down for a long period of time. Push the problem into the future. Better accounting treatment but in substance 75% of the same-ol- same-ol riskit depends on the real value of the CDOs.
I speculate TCP and Lone Star are both jumping the gun early in the distress marketbut they both are smart, smart men. And I am not.
"Did anyone notice that Merrill's stock was down 10% today?"
Oh, I'm sure most on this board noticed. Bunch a blogging anti-'merican non=patriots 'round these parts. The FDIC is gonna round 'em up and have a public flogging for people 'round here. And good riddance....oh wait.
I wonder how many HBS buddies are still out there to toss money to their network? By the looks of the losses, pretty soon even they are going to run out of capital.
This is just the most outrageous thing I've read yet in this debacle. I can't even believe that the SEC isn't banging on Thain's door with a set of handcuffs for those statements he made.
And after he made those statements, and this loss happened with the plans for a capital raise, a man with any shred of honor would have offed himself and resigned. But their craven board will do nothing.
I'm telling you the best event that could happen right now to shake all of this out is that the capital raise fails miserably. Let the place die. If you have this sort of money, you have the wherewithall to pick up the place cheap from BK in about three weeks when it folds.
a man with any shred of honor would have offed himself and resigned.
True, but he'll settle for walking off arms full of shareholder cash when the boot hits him in the ass. This is a banker and Wall Street we're talking about here.
I'm telling you the best event that could happen right now to shake all of this out is that the capital raise fails miserably.
Even that won't do it. I used to think that a zeroing out of financial stocks would restore confidence, but I think it's gone beyond that.
The sheer number of leaders that have lied in very public ways (Enron, Tabacco, Bush Administration) demands public humilation. The Singporeans practice caning for as little an infraction as graffiti.
A good public caning of Thain would be an appropriate response by Singapore.
OK, I better step away from the terminal before I burst a blood vessel.
i'm totally pissed at this. There is no excuse for a CEO ever making these statements whatsoever. He should have stayed silent or just fessed up. People are investing on what he says. Of course this is criminal. There should be an investigation into when they knew about the losses, exactly when and how everything was discussed, and then the staements interpolated into the record at the appropriate time.
I am sick to death of these executives giving everyone a bad name. THere are some out there that are not lining their pockets but trying to make businesses work. There are plenty of guys holding MBAs that did it for the love of it all, not for ego and self-enrichment...although I would be lying if I said motives are completely alturistic, but EVERYONE should make money, even if it comes in good jobs.
This is like just like a mafia racket without the murder. These guys should be barred from every being in an executive position ever again, and they should be foreced to disgorge everything they have.
I cannot fathom why Temasek would buy more stock knowing they were throwing good money at a total loser of a situation.
Not sure if this has been answered already (I didn't see it if it was), but they don't have a choice. The original deal allows ML to compensate them for the second offering in cash or stock, at ML's option. They are getting stock because that doesn't cost ML anything (just existing shareholders), whether they like it or not (probably the latter).
When does ROCK STAR Thain come out and claim that MER is comfortable with its capital position and defiantly pronounce they need no more capital. After all, Bernake and Paulson also claim that banks are well capitalized.
They are getting stock because that doesn't cost ML anything (just existing shareholders), whether they like it or not (probably the latter).
And if I were running Temasek, here is what I would do. I'd smile take the stock, and not give a dime to this raise. I'd wait for the exectives to toss in thier money, and then I'd turn around and start dumping the stock like you've never seen, driving the price into the ground all while shorting it all the way down.
But I'm like that because I'd view it as my mission, at this point, to teach them a lesson.
I'm relieved to know that others are angry. I'm very angry and even more angry knowing that this is just the foreplay. I'm starting to think I need a super colander tinfoil hat.
OK, I admit it... I do not see why this is so outrageous.
This is one company raising capital after they said they wouldn't. It does not affect me, because I did not make the mistake of trusting management and buying the stock.
Contrast with the housing bill and all the other bail-outs, where I have no choice but to participate via my tax dollars and dollar-denominated savings.
Sure, if MER shareholders want to sue Thain, or the SEC wants to prosecute, then hey, bully for them. I'll be rooting from the sidelines. But it still has nothing to do with me, or indeed anyone who is not a shareholder.
I am not saying this isn't absurd. I am saying that far more outrageous things have been in the news lately.
I have to ask why is Goldman Sachs getting a pass on the financials debacle? Are they doing something that different from apparently all their competitors? If, when Bear Stearns collapsed, the fed stepped in, not to save Bear Stearns, but rather, to save the market as a whole from the effects of counter-party risk from a failing BS, then how can investors really think that Goldman is worth $170 a share while simultaneously apparently thinking Lehman, Merrill, Fannie/Freddie, Citigroup, and Morgan Stanley are about ready to kick the bucket? If Lehman did fail, if Merrill quickly followed suit, wouldn't that represent a whole shitstorm of counter-party risk that could also threaten to swamp a Goldman Sachs, or does Goldman hold no trades with these guys that depends on their ability to pay up?
In short, shouldn't we be shorting the F&ck out of Goldman Sachs?
RobT writes:
Is there a reason WCI only had 7 days. Do they have an interest payment or something due?
Investors have called $125M in debt due Aug 4th. WCI only has 70M in cash. They are trying to float some sort of debt swap to stay alive. The outlook isn't good but given that Carl Icahn is Chairman of the Board and that SPF dodged a similar bullet, I wouldn't go shorting WCI--which trades at a whopping $1.30 anyway.
You can bet if the housing bill and paulson had rallied the market, it'd have been all over the news.
Got an eerie feeling watching Brian Williams' furtive mention of the stock market falling today. Always had this suspicion that when things get really bad, the press won't tell people what they need to know because the 'panic' bogeyman scares its bosses too much. It also won't be so foolish as to anger viewers with positive stories that will soon be proven false.
I like the Goldman connection as well; I've been looking at them for years trying to figure out what's up... so back to square one, because Paulson is a con artist and no way in hell is Goldman clean!
i believe the VIX intraday over 30 wasn't the top of this cycle. we may get a renewed spike to 32 or 33 with a close above 30. what a headfake that would be.
Is it late enough in the day/thread to state that I'll be buying the financials (XLF/UYG) when XLF hits $19.50 and rejects it on an hourly w/ light volume. Mark my words: this is a nice bullish spring. Light volume pullback into a high volume sign-of-strength. Plus added bonus of a doji last Friday that marked the half-way move at $21.00 from $22.50, another $1.50 more marks $19.50. The broad market should reverse with it (I was stopped out of SPY & DIA ultras w/ minor losses today). One other thing: if by some chance the broad market tests its lows this week then this correction is over, period.
This certainly looks bad for John Thain. He was considered to be a very capable chief executive when he led the NYSE. Either he became incredibly stupid overnight, or the bottom is falling out of CDO valuations. My guess is that Merrill never believed that these assets would sell for .15 on the dollar and therefore overestimated their capital adequacy. Now that we have an observable transaction at .15 on the dollar, imagine the marks other banks are going to have to take on their CDOs. This does feel like a death spiral.
I'm sure he would love to have his words back on all the reassurances he has given of the last eight months. His credibility at this stage is zero.
"In short, shouldn't we be shorting the F&ck out of Goldman Sachs"
I get your frustration, but as GS slowly fills up every spot at the Treasury, you end up fighting the guys that re-write the rules to prop up GS. Easier prey out there IMO.
Certain OTC derivatives trade in less liquid markets with limited pricing information, and the determination of fair value for these derivatives is inherently more difficult. Such instruments are classified within level 3 of the fair value hierarchy.
Where the firm does not have corroborating market evidence to support significant model inputs and cannot verify the model to market transactions, transaction price is initially used as the best estimate of fair value. Accordingly, when a pricing model is used to value such an instrument, the model is adjusted so that the model value at inception equals the transaction price. The valuations of these less liquid OTC derivatives are typically based on level 1 and/or level 2 inputs that can be observed in the market, as well as unobservable level 3 inputs. Subsequent to initial recognition, the firm updates the level 1 and level 2 inputs to reflect observable market changes, with resulting gains and losses reflected within level 3.
Level 3 inputs are only changed when corroborated by evidence such as similar market transactions, third-party pricing services and/or broker or dealer quotations, or other empirical market data. In circumstances where the firm cannot verify the model value to market transactions, it is possible that a different valuation model could produce a materially different estimate of fair value.
Accordingly, when a pricing model is used to value such an instrument, the model is adjusted so that the model value at inception equals the transaction price. This valuation is adjusted only when changes to inputs and assumptions are corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, and other transactions across the capital structure, offerings in the equity or debt capital markets, and changes in financial ratios or cash flows.For positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, managements best estimate is used.
in case anyone hasn't noticed, you can't even get shares to short of the gilded 19. i highly doubt there were that many naked short shares out there for such highly traded stocks.
The firm generally values exchange-traded derivatives within portfolios using models which calibrate to market clearing levels and eliminate timing differences between the closing price of the exchange-traded derivatives and their underlying cash instruments. In such cases, exchange-traded derivatives are classified within level 2 of the fair value hierarchy. OTC derivatives are valued using market transactions and other market evidence whenever possible, including market-based inputs to models, model calibration to market clearing transactions, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. Where models are used, the selection of a particular model to value an OTC derivative depends upon the contractual terms of, and specific risks inherent in, the instrument as well as the availability of pricing information in the market. The firm generally uses similar models to value similar instruments. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit curves, measures of volatility, prepayment rates and correlations of such inputs. For OTC derivatives that trade in liquid markets, such as generic forwards, swaps and options, model inputs can generally be verified and model selection does not involve significant management judgment. Such instruments are typically classified within level 2 of the fair value hierarchy. Certain OTC derivatives trade in less liquid markets with limited pricing information, and the determination of fair value for these derivatives is inherently more difficult. Such instruments are classified within level 3 of the fair value hierarchy.
I understand that GS runs the treasury, but that doesn't really answer my main question, which is, despite owning the treasury, how will GS survive a tsunami of counter-party failure? If the answer really has to do with the fed stepping in to save GS from every bank or IB that will fail, that basically tells me you think the fed will monetize all the bad debt out there.
Which means I should own more gold and oil (if that's possible in my portfolio).
"in case anyone hasn't noticed, you can't even get shares to short of the gilded 19"
Oh yeah. I noticed. And, I also noticed that before the rule I could get shares. I think now anyone with the shorts won't cover because it's tough to get positioned again. I think this rule mutes the rallies, going forward.
Fair Economist writes:
So basically Merrill would rather have 8.5 billion now than 11 billion in 6 months. That corresponds to being willing to pay a 67% interest rate. Urk.
Fair Economist | 07.28.08 - 8:09 pm | #
That's pretty much it. Sad or what. I can't wait for the CNBC spin job on this....
It certianly appears to be a death spiral...as the stock sinks, more moeny is owed to buy even more shares (if this was part of the contract) and then more money has to be extracted to offer more shares. Pretty soon the dilution is certian.
I still cant figure out this move. Im my opinion, ti does not appear focused on survival as far as MER as a going concern, is concerned.
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.
I would think there would be a correlation as to how all other banks and hedge funds have performed in regard to getting interest rate moves right and knowing (in advance) what The Fed ways going to do with rates.
I would think, Goldman has an inside man and friends that help hedge funds; too bad The DOJ is out of business!
GTT II Advisors finished the quarter with profits in fixed income. The main driver of returns was short positions on the front-end of the U.S. curve, as short-term yields rose on expectations of accelerated interest rate hikes by the Federal Reserve.
Goldman Sachs Hedge Fund Partners II LLC · 10-Q · For 3/31/06 SEC Info - Goldman Sachs Hedge Fund Partners II LLC - 10-Q - For 3/31/06
"The F.D.I.C. is still trying to unravel the mess at IndyMac. The tableau of the collapse was shocking, replete with a run on the bank, snaking lines of anxious customers and sober assurances from Washington. Not since the 1980s has an American bank failed so spectacularly."
But mp, there is sooo much money to be made if you are nimble enough.
I plan to be pretty flat before I go on vacation.
The big pop will be during the explicit war on shorts coming with the perception of 'outlawing' shorts that the SEC enforcement of no naked shorting will cause.
There's a subtext to the Merrill crash that's pretty interesting. Last Christmas Eve, I had dinner with a former top Merrill broker, now retired. The guy tipped me that Merrill's writedowns that quarter would be double the buzz. I came back and posted it here, and it was dead on.
The stock was like 52 then and the guy had a ton of it. Although he was cursing Stan O'Neil a blue streak on Xmas Eve, I'll bet he hasn't sold a share. There was (and still is) fierce loyalty to Merrill, based on the brand and culture they built and reputation they earned. A lot of it was on the retail side, with the brokers and top clients, and the incredible thing is how many of them still believe, even though they are cursing Merrill every other word.
When you fall this fast, it's bad. But when you fall this fast from a perch of being the people who could be totally trusted to make smart investment decisions for America's wealth elite, well...
@Anonymouse: There may very well be a trading opportunity coming up. But the big problem is forward earnings growth. Where are the big banks & IBanks going to make their money?
If we go through an extended period of asset deleveraging, it may turn into a nasty drought on Wall St.
The 'liberal media' serve their corporate masters - the wealthy ruling elite of this country and others. Thank god we have the internet and outlets like CR as long as we can keep them . . . make no mistake, efforts by AT&T, VZ etc. to kill net neutrality are an effort to stamp out places like this.
"In short, shouldn't we be shorting the F&ck out of Goldman Sachs"
Nah. Go for a sure thing . . . that rube barely is taking bets against Obama!
Hmm. I'm not much of a gambler . . . I meant to say that barely's willing to bet money Obama will lose to McCain in November, however that is properly phrased in bookie lingo. Taking bets? Placing bets?
Thx for taking my speculation serious enough for a response.
Here's an exact trading plan for my forecast: the XLF closed 7/16 at its high of $19.42; it gapped up on 7/17 and made a low of only $19.51, leaving a $0.09 gap. Now, even though I said the doji half-way move of last Friday projects down to $19.50, I still suspect the gap of $19.42 will get tested.
So here's how I trade it. I wait until $19.42 is tested, and I set my buy order for $19.51; that way, I'm waiting for the XLF to confirm that it's rejected the gap and comes back up to the breakout point before I buy it, so I'm not catching a bottom (knife) that may be much further down. So I'd buy XLF as it came back up to $19.51 and place my stop underneath that daily low.
Now suppose the XLF makes an intra-day low of $19.25, and I buy it at $19.51 with a stop (sell order) at $19.24 to limit my loss and the XLF makes a new daily low in the $18ish area or lower. Well I'll still wait with another buy order at $19.51 instead of picking a bottom, so it can prove to me that it's rejected the price and is back in its range. All of this is dependent on XLF remaining in a light volume sell-off. Volume is key here. Since XLF hit a high of $23.09 on 7/23, all three subsequent trading days have made lower lows on declining volume, benchmarked into the 7/17 highest volume day ever range. This is what's known as a bullish spring. And I intend to buy it.
I've heard from other people having trouble shorting at Fidelity. At the big internet sites with lots of daytraders on margin accounts (Ameritrade, Interactive Brokers, etc.) there doesn't seem to be any shortage of shares to short. I tried putting in short orders at Ameritrade above market on Fannie and Freddie just to see if they'd get canceled, but there was no problem.
His origin is a little hazy, but rumor has it he escaped from a hospital biohazard disposal shortly after Milken's prostate surgery; fortunately there was a veterinary clinic directly adjacent.
Gov. David A. Paterson and Mayor Michael R. Bloomberg warned on Monday of further deterioration in state and city finances, with each saying that he or his successor would have to grapple with huge budget deficits in the years ahead.
The Moore Inflation Predictor (MIP) is a highly accurate graphical representation forecasting the future direction of the inflation rate. It has a 97%+ accuracy rate on forecasting inflation rate direction & turning points. And over 90% of the time the inflation rate falls within the projected "likely" range and 7% of the time it falls within the "possible" range.
Win-win for MER and Temasek, basically because MER needs the cash and Temasek's earlier purchases don't look so bad now, it was about 50% loss at end of today before this.
Am surprised that Temasek is still buying more common though, shows that they don't think that MER will collapse totally. Could they be wrong this time?
Think that things have changed for the worse in a relatively short time. I do not believe that MER is the only financial that is facing this now.
Covered Bonds - anything to try to keep the game going.
What's with Paulson wanting to backstop freddie and fannie by buying common? You think GS must own shares of freddie and fannie?
ipodius: This is like just like a mafia racket without the murder.
Wow. Did you buy into that whole bottom in financials thing or what?
I used to get all flustered about the lying Fed and the big giant mathematical fraud that is financial derivatives. The only brownian motion on wall street these days are in bankers' shorts. I still make snarky comments and do a few photoshop jobs, but I'm working on getting past any idealistic desire for justice or accountability. Now I split my time between speaking for justice and reason and pragmatically running around sheering the stupid f*cking sheep. Don't ya know? Winter is coming.
And of course all this solves Merrill's problems for good. Won't be another gaping hole in capital to be filled ever again, right? I mean Merrill will still be around two years from now, right? BTW how much of Merrilly does Temasek now own?
Does the MER deal strike anyone as being a bit hasty? The SFW were able to save face, but why did MER want to rush this out the door now? How about that stock action today? 10% down - seems like an insider had the tip off.
So does anyone else feel that the 90% haircut NAB gave to structured credit products might have been the trigger for this flood?? This deal was probably in the works for weeks, but got hurried along with NAB's bombshell. MER probably realized that things are going to get a hell of a lot worse - so they need to grab cash now...
Yes, I've ordered the book you recommended last week. Geez...
That said, I can't fault your ability to peg things. You've done well.
But do all TA guys/ladies have such difficulty with the English language? It's like having to shop at Sears with all of the signs in Spanglish.
Allow me to translate for you Dad, what Anonymouse is suggesting is that there is money to be made IN THE SHORT-TERM buying XLF at $ 19.51.
Noting what is on the horizon, feel free to pick your own definition of "Short-Term."
How the Cabal keeps this train-wreck prop'd-up until the end of the year is beyond me......
Shares of Merrill Lynch & Co. Inc. led the financial sector lower, dropping 11.5% amid heavy activity among bearish investors in the options market. The stock hit a 52-week low of $24.26 a share and ended at $24.33 a share, as last weeks brief relief gave way to more insecurity. But options analysts had a hard time pinning down the reason behind the decline, as Mike McCarty, options strategist at Meridian Equity Partners, says there was nothing to explain the pick-up in implied volatility. Same goes for the credit markets, where credit-default swaps of Merrill, which measure the cost of insuring its debt against default, rose to $355,000 to insure $10 million in bonds against default for five years, up from $310,000 Friday, according to Phoenix Partners Group. Heavy bets were made in both August and September options, with more than 11,000 put options changing hands at the September $22.50 strike price. Were starting to see 10% moves as not uncommon on a daily basis, says Chris Rich, Newedge Group senior options strategist.
Bank of America Corp. analyst Michael Hecht increased his forecast for Merrill's full-year loss by 51 percent to $11.55 per share and 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 manages $2.7 billion and doesn't own Merrill shares.This kind of announcement is surprising and a little disheartening.''
Jessica Oppenheim, a Merrill spokeswoman in New York, declined to comment.
Merrill has lost almost 55 percent of its market value this year. The shares fell 12 percent yesterday in New York Stock Exchange composite trading. They were little-changed in after- hours trading.
At 6/30 MER had $16.1 bil in tangible equity, $16.34 in tangible equity per share, and a 1.55% ratio of tangible equity to tangible assets. (Yowsa!!)
So, pro-forma tangible equity (post-offering and write-downs) should approximate (in billions):
$16.1 + 8.5 (stock offering) + 3.5 (sale of Financial Data Services) + 4.43 (sale of Bloomberg stake) - 5.7 (new write downs) - 2.5 (payment to Temasek) = $24.33 billion
(I didn't apply taxes to the asset sales because MER has plenty of NOLs to use up at this point.)
Shares outstanding, assuming a $22 offer price, are 985.4 mil + 386.5 mil = 1.372 bil shares
So, after the dust settles, tangible equity per share actually increases to $17.73/share, and tangible equity to tangible assets increases to between 2.5%-3.0% (depending on how much balance sheet shrinkage takes place), so leverage declines materially.
So, MER is clearly better off after all of these machinations, BUT... the biggest issue is the pricing of the equity offering. Are people willing to pay $22/share after this write-down debacle and what should be a pretty substantial loss of trust (both in MER and the financial group in general)? We'll see. But I can see a bullish case being spun here (not that I'm buying it, of course.)
Of course...that $17.73 tangible book value per share is under the somewhat absurd assumption that the remaining assets are valued properly (which they're undoubtedly not). For example, one could make the argument (as others already have) that the write-down of the sold CDOs isn't done because of the manner of the sale. Also, I don't know how big of a deferred tax asset MER has booked (under the assumption that the company will earn enough to utilize it). So, aside from the remaining Level III assets, there's a lot of potential monkey business in the tangible equity calculation.
Is there a reason WCI only had 7 days. Do they have an interest payment or something due?
They've got a $125M note that is callable, and < $70M in cash.
dk, I suspect your suspicions are right. I think that NAB's mark to market made the tide start to go out -and the naked swimmers start to flail about for coverage that isn't there.
I love the description of this (WSJ used the teaser Merrill tries to lance the boil on their online frontpage, an expression that deserves legs:
-snip- The move was described by a person close to Merrill as an effort to "lance the boil" that has resulted in more than $46 billion in write-downs since June 2007. Dumping the assets for just 22 cents on the dollar will result in a write-down of $5.7 billion. That is an ominous sign for other Wall Street firms and commercial banks trying to get rid of loans and securities in a market flooded with distressed assets.
I first heard the term "death spiral" (in the context of terminal/expensive capital raising)from the late Zeev Hed on Silicon Investor back in 2000.
robbie | 07.29.08 - 12:47 am | #
It specifically referred to convertible issues where the conversion price wasn't fixed, but instead was tied to the market price of the strike. The cheaper the common gets, the more shares issued at conversion and thus the more the prospective dilution, which further drives down the price of the common, etc.
It's terminal; I don't think I've ever seen the common survive one of these deals.
Merrill's deal with Temasek wasn't a death spiral, since at least they had the choice of whether and when to reset.
That they made the choice to reset speaks volumes, of course.
Buy, buy, buy! Everything only goes up! This is today's scam to prop things up since yesterday's scam (the Bailout Bill) didn't "save" the market. Tomorrow, we'll have a new scam, but that's okay - just buy!
Of course...that $17.73 tangible book value per share is under the somewhat absurd assumption that the remaining assets are valued properly
Dave, by my valuation model, and taking into account what I think their assets are worth, I come up with 11.08 per share. And that's from what I can GUESS now. In the end, they may be worth no more than BSC was and I think that is probably the destination.
I'm just outraged at the management behavior here, and I agree with mp wholeheartedly: for the most part, I am not in this market. The next two quarters are going to be a disaster for most earnings, and we're not even halfway done with the financial sector writedowns and problems. My positions are very surgical right now.
Dilution is the solution to pollution, not the illegal-immigration-subprime-borrower-houses-for-all-socialist-lending-created-mortgage crisis.
Houses for any and all. Can't afford a 600k house, here's a 1.9% APR interest-only loan for one year (6.9% thereafter). No SS#? Not a problem, here's an ITIN number. No credit? What's the matter? Sign here for your American dream. Have equity? Need an Escalade with 5k custom wheels to impress your friends? Here's a blank check. Just buy a house and can't afford the landscaping? You have 40k in equity! Here's your check. No payments for 5 years. Drop in a pool. Buy a car. It's FREE MONEY! Prices are going up, up, up. Sell it in 4 years and cash out. You can't lose in this pyramid scheme.
White guy with a decent job? I need to see pay stubs, bank statements, IRAs, 403bs, assets. We want to know about everything that you have.
I didn't have time to look through all the comments.
However, I see this as a Thain move more oriented to Management then shareholders.
The first comments on this being a "hard money" deal -- I agree totally. They have two moves, this and selling Blackrock. Unless they believe Blackrock is 70% undervalued, then it makes no sense for the shareholders to take the penalty on issuing equity when they could sell assets first.
Thain was named in 4Q 07 -- so any problems hanging around after a year -- he owns. As far as the CDO's, they had a par of more like $30 billion, and have finally been sold a huge discount to par. The pain of writing these down every quarter has become unbearable for Thain. There is very little appetite for these and they took another huge haircut. Even though they financed 3/4 of it, this gets them off Merrill's books either forever or at least for quite a while.
I'm sure that there is an argument for this deal. It's just that I think the order of the moves has more to do with Thain then the economics of the situation. No surprise there.
A lot of this is from reading the press release yesterday, so all my figures are rough estimates/from memory.
MER didn't really sell anything today. It traded it's supersenior CDO posy for a loan to Loan Star backed by the supersenior CDO posy Loan Star now has! Not only that, but the loan is non-recourse. So MER financed 75% of the 'sale' of its supersenior posy, so it's on the hook for that whole 75% financing with no recourse back to Lone Star. So MER is now short the 75% put on the bonds Lone Star is holding for them. From Lone Star's perspective, well, they basically paid $1.675B (25% of $6.7B purchase price) for a call on bonds that originally had a face value of $30.6B. They paid 5.47 cents on the ORIGINAL dollar.
Thain is a smart man but I think that he is not being forthright about what this deal really means. That is just my opinion.
The economics of the deal suck for MER shareholders. The fact the bonds were written down AGAIN prior to the sale plus Lone Star has the first 25% of the possible remaining losses seems like a good argument that they won't have to be written down AGAIN soon.
I would buy some at 10 cents on the dollar, sight unseen. I dunno what they are, but as long as they aren't all CDO^2 or worse, or the lowest rated tranches, then someone will pay off a loan or two in the entire book.
It would be much better if MER didn't finance it, but Lone Star is taking the riskiest 1/4.
I see it as an accounting driven decision rather then a decision driven by economics. MER absolutely has to book a profit within a couple of quarters, and writing these things down a couple a billion a quarter is just too hard to stomach. For everyone, but especially Thain, who can still blame it on previous management but only for another quarter or two. You only get 3 quarters to blame Stan/previous management.
The bottom for financials will be when either they go bust or something / anything is written up. If they dump every asset at the bottom, then they miss this opportunity and have diluted the hell out of the common.
From an economic perspective, they have lost over the $30 billion on these things -- if you count the dilution.
My guess is that MER will do anything to report some sort of profit in Q4. If that means another huge dump and the sale of Blackrock in Q3, then it will happen.
In less financially stressful environments, I have seen new management write down every thing including the kitchen sink, which, in at least a couple of cases has given them (management) a couple of years to book whatever the hell they want.
Maybe in the future they will talk a little less about capital efficiency (leverage) as a virtue -- but no one is gonna repeal cycles, so it will happen again. Too bad inflection points are so difficult to call with precision.
Oh yea....I'm not saying that MER is going to survive....just that if it happens, they will look so stupid, buying high (stock buybacks in 07) and selling low.
Totally off-topic.
Thanks CR and Tanta for (largely) keeping politics off this blog.
I say this as I just spent 20 minutes rubber-necking the car crash at Maxed Out Mamas blog:
MaxedOutMama
Totally my fault. Usually I skip over her political posts, but Post-Modernism And Obama just sucked me in.
Who would have guessed that topic would generate usage of the terms socialist, Marxist, fascist, Jesus and Dukakis? Shocking!
I did, however, enjoy this bit of snark:
Might I point out that Jesus didn't believe in objective meaning, therefore Obama . . . wait a minute!
That would make Obama the Son of God!
I thought he was a Marxist!
What the hell!
So basically Merrill would rather have 8.5 billion now than 11 billion in 6 months. That corresponds to being willing to pay a 67% interest rate. Urk.
What a debacle this is
Fair Economist, I think that is called "hard money"! Clearly they couldn't wait ...
Best Wishes.
although the good news is there is no future reset protection for Temasek.
I can't imagine there is going to be a "next time", or at least a "next time" that leaves anything for common.
When do we tell the little people their 401K's are worthless? Who really holds all this crappy paper...at the end of the day?
The financing gets more and more creative. I wonder what it looks like at the end?
OMG my head is spinning reading this. WTF is MER doing here? This seems like a seriously desperate move.
Seems like this was the best move for the management.
Seems like it was the worst move for the shareholders.
I wonder what it looks like at the end?
For reference, see the tech wreck.
Only this is bigger. Much bigger.
Erm,
"Merrill Lynch has agreed to pay Temasek $2.5 billion, 100% of which Temasek has contractually agreed to invest in the offering at the public offering price"
How does MER raise money? They just printed up about 102M shares of stock and gave them to Temasek.
Methinks someone dropped acid AND shrooms at the same time, waited an hour, then started calculatin'.
This whole deal seems like a hide the bad debt scheeme. What is this? Level4 assets.
Cheers,
I'd say that this is a measure of how darned quickly ML's position fell apart. I feel stupid for being so amazed. It sounds like they believed their own press releases.
The only reason I can see Temasek taking this deal is to take over the company and then throw everyone out the door. From there, they put their own people in and start over.
CR, I get the hard money and "can't wait" business. But the extent to which they need it is breathtaking. The most favorable interpretation is that they expect their stock to drop 30% in the next 6 months. If they actually need the cash now, then their debt should be below investment grade. WAY below.
The only reason I can see Temasek taking this deal is to take over the company and then throw everyone out the door. From there, they put their own people in and start over.
How? As holders of common, they are first in line to be thrown to the lions.
Hey MoM,
What were you thinking with that "Obama is a post-modernist girlie-man" post?
Seriously. Not your best day.
CR,
you are one of my heroes. thank you for all the hard work.
Anybody want to check my math?
The SEC filing says Temasek paid $4.4 billion for Merrill stock at $48/share. Meaning they bought 91.67 million shares.
Merrill has to "to compensate Purchaser for the aggregate excess amount per share paid by Purchaser". They are compensating Temasek to the tune of $2.5B. $2.5B divided by 91.67M equals $27.27/share "excess" that Temasek paid.
So this new offering is going through at $20.73/share. Maybe.
"Obama is a post-modernist girlie-man"
I thought all post modernists were girlie-men,
male or female.
Surely Wall Street will find a silver lining in the news.
If not, the Kremlin, I mean Washington, will inflate another life raft for MER / flavor-of-the-day-dumbass-finance-company.
Erik: Seconded. Indispensable dude. Best on the web.
How do you say "average down" in Singaporean?
Why would an SWF do this? "Gimme the money and piss off yuh deadbeat" is what I'd tell MER.
Their investment has taken a 50% HAIR CUT! Guess asians really like gambling. Let it ride and oh yeah I'm doubling down.
Good Glod! Even I know when to get up from the table.
Cheers,
How do you say "average down" in Singaporean?
Average down, la?
OT: A person asked why his gold stocks in a small cap company he owns has stayed around the same price even though gold has rocketed during the same time frame. Companies use a term called "Feeding the Ducks" where when the ducks start quacking (investors) they get feed (print more stock certificates). This guy did not understand that if a company prints more stock that the shares are diluted. This was at a conference of high net worth investors!!!
jp: How? As holders of common, they are first in line to be thrown to the lions.
JP: I agree with you. I cannot fathom why Temasek would buy more stock knowing they were throwing good money at a total loser of a situation.
and FYI:
Canadian: Eh? :: Singaporean : La.
Why isn't the CDO sale effectively an off-balance sheet transaction? ML is financing the sale -- and if they buyer fails to repay the loan, ML can only go after the assets -- the CDOs themselves -- which presumably would have fallen in value in this case. It appears to me that this structure doesn't really put the CDOs outside ML. In the worst case where the value of the CDOs collapses beyond the current discount, it would appear that the buyer would default on the loan and ML would be forced to pull the CDOs back on its books?
From ML's press releases regarding the CDO sale:
Merrill Lynch will provide financing to the purchaser for approximately 75 percent of the purchase price. The recourse on this loan will be limited to the assets of the purchaser. The purchaser will not own any assets other than those sold pursuant to this transaction. The transaction is expected to close within 60 days.
Does TPG have to pay Temasek a royalty for this
"poison pill" idea, which they obviously cribbed when they bought WAMU at $13?
tra la la
YouTube - Banana Splits
Cheers,
So $2.5 goes to Temasek, and $2.4 in "additional dividends" goes to preferred shareholders. The net capital at the end of the day would seem to just be $3.6 billion raised.
But $8.5 billion in new shares issued! So the common stockholders massively diluted, with only $3.6 billion in new capital to show for it. All on a day when $5.7 in new writedowns announced.
I must feel great to be a MER shareholder tonight.
Nemo, I think there might be another sale of more shares to Temasek in March. It's hard to wade through all the 8-Ks!
I think the new price is probably around $24.
Best Wishes.
What about the 2.4bn convertible prefferred. The 2.5bn will increase cause the offering price will be below end of close july 25th.
Forget MaxedOutMama, she is nothing but an ideologue packaged in fancy language. Just check outat her oil calls two and three years ago and see how terribly wrong she was then.
Her ideology overrides all reason and even comprehension. She is an utter waste of time.
I cannot fathom why Temasek would buy more stock knowing they were throwing good money at a total loser of a situation.
I'm scratching my head too. Just imagine the sales job that MER pulled off:
Suckers.
Sorry "IT must feel great to be a MER shareholder"
(don't want anyone to worry that I am one)
Mr. Beach,
"Why isn't the CDO sale effectively an off-balance sheet transaction?"
Exactly. Like I said, these are now level4 assets. Or liabilities...or something.
The words "to high heaven" and "stinks" come to mind.
Cheers,
LOL LOL LOL
"During a conference call on July 17, Thain said: "Right now we believe that we are in a very comfortable spot in terms of our capital.""
Merrill sets $5.7 billion write-down, to sell stock
| Reuters
Ok, there's this bridge in Brooklyn that's for sale...
Here's more from the link posted at 8:38pm:
Merrill still has wide exposure to mortgage debt.
As of June 27, it said it had exposures of $33.7 billion to U.S. prime mortgages, $1.01 billion to U.S. subprime mortgages, $1.54 billion to "Alt-A" mortgages and $7.45 billion to non- U.S. residential mortgages.
William Smith, president of Smith Asset Management Inc in New York, said Merrill fetched a "horrendous" price for the CDOs.
"The problem here is with Thain. You can throw him into the credibility problem camp now," Smith said. "It's tough to call the bottoms on these things because it seems like it's never ending, but this could be viewed as the watershed."
Temasek was not immediately available for comment.
Corn, Soybeans Rise as Heat, Dry Weather Threaten U.S. Crops
Corn, Soybeans Rise as Heat, Dry Weather Threaten U.S. Crops - Bloomberg.com
These guys are Cornholiod, they will be ASSimilated.
http://www.weblinks247.com/indexes/idx24_usd_en_2.gif
Bucky is going to get a well deserved ass beating for all the foolishness that has been going on. Don't get any on your shoes.
PS - anyone know how MER's $33.7 billion prime mortgage portfolio is holding up?
Well, this is interesting:
"The company claimed in 2008 that it is not a sovereign wealth fund, with its spokesman saying the company "has to sell assets to raise cash for new investments and doesn't require the government to give approvals"[2]. Temasek was able to be excluded from an agreement between Singapore and the United States requiring greater disclosure and transparency in transactions involving sovereign wealth funds, which included the Government of Singapore Investment Corporation (GIC), claiming it "already meets disclosure guidelines" and provides more details than sovereign wealth funds. There has been no public suggestion that the Singapore Government's granting of military facilities for the US Armed forces influenced the United States in its decision on this matter."
Temasek Holdings - Wikipedia, the free encyclopedia
And by interesting I mean corrupt. Singapore knows a thing or two about crony capitalism. Not that Wall Street doesn't. Just sayin'.
Cheers,
From the WSJ:
"Merrill said it would finance about 75% of the value of the deal. Other banks with toxic assets have taken similar action, in their quest to find someone to take the assets off their hands. Despite the steep discount, Merrill's sale may bode well for other firms on Wall Street such as Lehman Brothers Holdings Inc. that are also sitting on hard-to-sell assets."
Why would it "bode well" for anyone else that Merrill took a steep discount and had to finance 75% of the sale on a non-recourse, carryback basis? Sounds like it's just the opposite.
Damn that will leave a mark.
Off topic but anybody know where I can find some info on STI
Labels:Haircut
I can't even believe that ANYONE would, at this point, toss any money at MER. How much lying can one guy do (Thain) before everyone just lets them die? The management has stood up and mis-represented the state of the company at every turn. When is this actionable?
There are two choices here: Thain and management knew the state of the company and were outright lying, or they didn't know and told the truth. One is just as bad as the other, except one should be a legal case.
This is just getting stoopider and stoopider. Anyone that buys even one share of this offer deserves to lose everything. The company should just die and serve as a warning to others.
Retail MER common holders/purchasers have been systematically abused over the past 3 trading sessions. Is there reason to believe the news of this deal might have enriched a few that got an advance peek ? Appears that way.
Should do a lot to instill confidence in the equities markets!
ipodius,
"I can't even believe that ANYONE would, at this point, toss any money at MER."
I thought MER was tossing stock at Temasek?
Cheers,
When is this actionable?
Since these are SWFs, I would worry more about the nature of the action. I mean, these guys have veerrrry different ways to mete out justice.
ie, Keep in mind that Singapore punished graffiti by caning.
Details...
approx 365 mil shares.
raise 8.5B but write down 8.2B ..
Temasek buys 3.4B in stock but they are getting 2.5B of that for free in exchange for giving up the rachet provision in the last offering.
36% dillution..
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.
Should do a lot to instill confidence in the equities markets!
What fraction of idiots is going to see this as good news tomorrow? I mean all the bad news is out now. (And this time we really really really mean it.)
BTW, I'm offering no dividend shares in brain cell #3. Sure it's a bit flakey, and may not make out the year, but if I can find an SWF to buy said shares, you guys could short the hell out of it.
Makes sense to me.
Cheers,
Misean, in order for them to toss stock, someone has to participate in the offer. Crickets should chirp and Temasek, if there were one fucntioning brain cell in the organization, would say "here's what you owe us to do this deal, have a nice day". somewhere around 3.7B is needed in addtional investment to make this deal happen.
Crickets should chip.
Another Saturday night workin' on my new hobby
Looting the future so the pigmen get paid
Better be glad I've got just six months left
You're in an awful way!
FASB may delay off-balance sheet accounting change
FASB may delay off-balance sheet accounting change
| Reuters
Cooking the books to be extended, buy up.
OT (but just as much fun) - Nikkei off 265 in early morning.
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.
I guess we're finding out the mark of these assets, aren't we? Which means that you should look at each IB and mark down what they are telling you they are holding accordingly. What does that do to Goldman's level 3's? And, btw, this wasn't in the last month. This is what they were worth even then, they just lied about that too, or their models are worth shit. Again, two choices: they are completely stupid and don't deserve to be saved, or they are criminal. Take your pick.
Ahem:
"Business Wire 07/17/2008 4:10 PM ET
Merrill Lynch (NYSE: MER) today reported a net loss from continuing operations for the second quarter of 2008 of $4.6 billion, or $4.95 per diluted share, compared to net earnings from continuing operations of $2.0 billion, or $2.10 per diluted share, for the second quarter of 2007. Merrill Lynch's net loss for the second quarter of 2008 was $4.7 billion, or $4.97 per diluted share, compared to net earnings of $2.1 billion, or $2.24 per diluted share, for the year-ago quarter. Second quarter 2008 results included a restructuring charge of $445 million pre-tax ($286 million after-tax) arising from headcount reductions completed during the quarter."
Doesn't all of this make their stock worth less than toilet paper used to clean diarrhea?
Cheers,
It just keeps getting worst. The term that goes through my head is fiancing death spiral. Each time they get more financing, I am sure that the next person will want the same purchase price protection. Also, does this prevent Lone Star from shorting the stock?
Here is my throught. If they force the stock down by shorting the stock or lending out the stock for shorting (even better as they get paid but don't actually sell the asset which may trigger some legal issues), they could be making a profit by the shorting as well as the price protection. Interesting thought.
Price Reset
\tSubject to certain conditions and exceptions, if the Company sells or agrees to sell more than $1bn of any common stock (or equity securities convertible into common stock) within one year of closing at a purchase, conversion or reference price per share less than $52.40, then the conversion ratio for the preferred stock shall be adjusted to compensate the investor on a full-ratchet basis.
Mandatorily convertible 2.4bn is a reset cash outflow on top of the 2.5bn.
Here's the 8k filing from Jan 16th.
EX-3.9 & 4.8
I see evil, I see we have an intruder and as usual, "exception is more striking than the rule" and the parasite will prey upon the host.
Nice list of Thain quotes:
Page Not Found | Reuters.com
My favorite:
Right now we believe that we are in a very comfortable spot in terms of our capital." (July 17, 2008 -- Thain on a conference call after posting Merrill's second-quarter results)
ipodius,
"Crickets should chirp and Temasek, if there were one fucntioning brain cell in the organization, would say "here's what you owe us to do this deal, have a nice day"."
Oh I said as much earlier in the thread.
Cheers.
JP, i know and from where I sit, that statement is criminal. You cannot tell me for one second that this guy had no idea what the loss was going to be on July 17. I know what NEXT quarter's profit/loss will likely be at my place months before it happens. You have to be a complete idiot not to know where everything is heading. The CFO reports weekly everywhere.
This is just kabuki of the absurd. All of these should just go down and let the market clear. THAT'S how to get this over with, not by propping up things endlessly.
PS - anyone know how MER's $33.7 billion prime mortgage portfolio is holding up?
Based on this deal, I think Merrill's management knows something ...
Quotes from Merrill's Thain on capital needs
FACTBOX: Quotes from Merrill's Thain on capital needs
| Reuters
This clown will be history in less then a week.
This clown will be history in less then a week.
What?! He'll be put in the Pantheon of great economic leaders, right next to Lereah.
Did anyone notice that Merrill's stock was down 10% today? Of course, the announcement of this debacle didn't come until after the closing bell. Who do you think was tipped off early?
Mostly these facts are business history from the Wall Street Journal but there may be a smattering of tales out of school. The Bass Brothers were initial distress investors in the S&L crisis. Bonderman and Coulter (now TCP partners) were part of the team and so was the guy or team that is now Lone Star( his name escapes me at the moment). The Bass Brothers bought American Savings and the team ran it. They were (and are) great businessmen. My perception is they made a ton of money on American which ultimately turned into WaMu through a variety of mergers.
The Bass brothers cashed out pretty early in the American investment and generally promised themselves they would never again invest in such a regulated an entity as a Bank. Bonderman and Coulter on the other hand, liked the businessso there was a gentle and amicable separation of the ways. Although I suspect they still invest along with each other from time to time to this day.
It seems to me that both TCP and LoneStar, since they matured in the distressed debt environment of the American days, are jumping the gun and investing to early.
TCP with WaMu (less due diligence, since they know the management from years ago) and also symptomised with their now broken discussions with HBOS in England.
Lone Star with this Merrill deal.
First, here is how I perceive the accounting. Merrill sells at $6.7 Billion taking the write down of 4.4 billion from the mark-to-model value last month of 11.1 billion.
Lone Star comes to the table with 25% of 6.7 Billion or 1.675 Billion. This is the first loss position ( like JPMorgan in the Bear financing). This is so, because it is a non recourse loan (similar to commercial real estate construction loan of say a shopping mall). Non Recourse means the lender can only look to collateral for reimbursement and not the credit or other assets of the borrower. Hence the shell corporation borrower (affiliate of Lone Star) as the Purchaser of the Assets and borrower. In the event of a default by the borrower shellMerrill has no one of any financial substance to sue. It can only take the collateral.
Why does Merrill do this? I speculate that they can account for it-- as a new loan-- without write-down for a long period of time. Push the problem into the future. Better accounting treatment but in substance 75% of the same-ol- same-ol riskit depends on the real value of the CDOs.
I speculate TCP and Lone Star are both jumping the gun early in the distress marketbut they both are smart, smart men. And I am not.
best to all
Dive, dive!!
Tom Lindmark,
"Did anyone notice that Merrill's stock was down 10% today?"
Oh, I'm sure most on this board noticed. Bunch a blogging anti-'merican non=patriots 'round these parts. The FDIC is gonna round 'em up and have a public flogging for people 'round here. And good riddance....oh wait.
Cheers,
While I understand the schoolgirl excitement about Merrill, let's not forget that the WCI bankruptcy clock is down to 7 days.
Commence detonation sequence ... T-minus 604,800, 604,799, ... til'
<a href="http://vinylrecords.ch/N/NU/Nuclear_Assault/Game/nuclear-game-over-50.jpg>Game Over, man!
This clown will be history in less then a week.
I wonder how many HBS buddies are still out there to toss money to their network? By the looks of the losses, pretty soon even they are going to run out of capital.
This is just the most outrageous thing I've read yet in this debacle. I can't even believe that the SEC isn't banging on Thain's door with a set of handcuffs for those statements he made.
And after he made those statements, and this loss happened with the plans for a capital raise, a man with any shred of honor would have offed himself and resigned. But their craven board will do nothing.
I'm telling you the best event that could happen right now to shake all of this out is that the capital raise fails miserably. Let the place die. If you have this sort of money, you have the wherewithall to pick up the place cheap from BK in about three weeks when it folds.
barely writes:
Is there reason to believe the news of this deal might have enriched a few that got an advance peek ? Appears that way.
Rest assured that SEC is on top of this. They'll be making damn sure that all short sales were good and proper.
"a man with any shred of honor would have offed himself and resigned."
Hmm...You'd have to do the second first and the first second. Otherwise the second really isn't necessary.
Cheers,
Game over,
YouTube - gamer over man, game over
Cheers,
Misean writes:
"a man with any shred of honor would have offed himself and resigned."
Hmm...You'd have to do the second first and the first second. Otherwise the second really isn't necessary.
My monitor just got a beer shower. LMAO!!!
a man with any shred of honor would have offed himself and resigned.
True, but he'll settle for walking off arms full of shareholder cash when the boot hits him in the ass. This is a banker and Wall Street we're talking about here.
I'm telling you the best event that could happen right now to shake all of this out is that the capital raise fails miserably.
Even that won't do it. I used to think that a zeroing out of financial stocks would restore confidence, but I think it's gone beyond that.
The sheer number of leaders that have lied in very public ways (Enron, Tabacco, Bush Administration) demands public humilation. The Singporeans practice caning for as little an infraction as graffiti.
A good public caning of Thain would be an appropriate response by Singapore.
OK, I better step away from the terminal before I burst a blood vessel.
Mis - Classic! that's the exact clip I was thinking of.
Any bankers holding WCI debt will soon resemble that guy.
Yeah...I dont want to pick a fight, but if you're not pissed off by all of this, you're either a dumb or a dick.
And if you think this is anything but a criminal act, you're a dumb...or I am a dumb dick.
my impression:
Captain (to passengers): pay no attention to the ice shards on the deck.
Captain (to deck crew): quick, rearrange the deck chairs every hour on the hour !
Captain (to life boat crew): standby
cs,
I know.
That's why I'm here.
Cheers,
CSC,
"you're either a dumb or a dick."
I'm both yet I'm still pissed. How does that work? Or is this non-exclusionary? Oh wait, you have to be one or the other. Nevermind.
Cheers,
i'm totally pissed at this. There is no excuse for a CEO ever making these statements whatsoever. He should have stayed silent or just fessed up. People are investing on what he says. Of course this is criminal. There should be an investigation into when they knew about the losses, exactly when and how everything was discussed, and then the staements interpolated into the record at the appropriate time.
I am sick to death of these executives giving everyone a bad name. THere are some out there that are not lining their pockets but trying to make businesses work. There are plenty of guys holding MBAs that did it for the love of it all, not for ego and self-enrichment...although I would be lying if I said motives are completely alturistic, but EVERYONE should make money, even if it comes in good jobs.
This is like just like a mafia racket without the murder. These guys should be barred from every being in an executive position ever again, and they should be foreced to disgorge everything they have.
I cannot fathom why Temasek would buy more stock knowing they were throwing good money at a total loser of a situation.
Not sure if this has been answered already (I didn't see it if it was), but they don't have a choice. The original deal allows ML to compensate them for the second offering in cash or stock, at ML's option. They are getting stock because that doesn't cost ML anything (just existing shareholders), whether they like it or not (probably the latter).
When does ROCK STAR Thain come out and claim that MER is comfortable with its capital position and defiantly pronounce they need no more capital. After all, Bernake and Paulson also claim that banks are well capitalized.
They are getting stock because that doesn't cost ML anything (just existing shareholders), whether they like it or not (probably the latter).
And if I were running Temasek, here is what I would do. I'd smile take the stock, and not give a dime to this raise. I'd wait for the exectives to toss in thier money, and then I'd turn around and start dumping the stock like you've never seen, driving the price into the ground all while shorting it all the way down.
But I'm like that because I'd view it as my mission, at this point, to teach them a lesson.
Is there a reason WCI only had 7 days. Do they have an interest payment or something due?
I'm relieved to know that others are angry. I'm very angry and even more angry knowing that this is just the foreplay. I'm starting to think I need a super colander tinfoil hat.
Angry! Oh don't worry I know just what you need.
oooooboy, here we go agai
CSC,
Misean tunes up a hell of a hat there, though its an absolute pig with the power supply!
Yeah? Well ain't gonna happen. Because we got Kimbo Slice on our team. And he hates the FDIC.
Kimbo Slice vs Adryan - Kimbo Slice Fights
"No feelings. You don't win 'em all, you don't love 'em all, you keep on fighting and if you need a friend, get a dog."
Gordon Gekko
enrgy,
12 Volts and LOTS of amps. Sure battery costs are high...but it's the price I pay for protection. I like it's glow in the middle of the night.
rich,
Bar knuckled boxing...hoocoodanode!
Cheers,
Having arrived late, it would appear that most everyone is upset over Merrill's latest move.
Why?
Only because I know how much everyone here reveres the quality of CNBC's reporting.
Currently on their Home Page:
Merrill's Misery: Is the bottom in sight?
I should have had more puts first?
OK, I admit it... I do not see why this is so outrageous.
This is one company raising capital after they said they wouldn't. It does not affect me, because I did not make the mistake of trusting management and buying the stock.
Contrast with the housing bill and all the other bail-outs, where I have no choice but to participate via my tax dollars and dollar-denominated savings.
Sure, if MER shareholders want to sue Thain, or the SEC wants to prosecute, then hey, bully for them. I'll be rooting from the sidelines. But it still has nothing to do with me, or indeed anyone who is not a shareholder.
I am not saying this isn't absurd. I am saying that far more outrageous things have been in the news lately.
I can't even believe that ANYONE would, at this point, toss any money at MER.
Except for maybe a nice short rally.
I know somebody who picked up 75% in about a week on WB (not me... I don't have the nerve for that kind of stuff).
ac,
"I can't even believe that ANYONE would, at this point, toss any money at MER."
Pfff...why not it's just freaking paper. And out legisltature has just said they'll print the shite up by the boatload to bail out wallstreet.
Meh...
Cheers,
Interesting thought: Singapore is the canary in the mine shaft.
Monday manifesto: is Singapore the canary in the mine? - Times Online
Re: "Having arrived late'
Where the hell have you been and WTF have you been doing? What about the bag, we need the bag!!
When you refer to "the bag," I assume you mean Conjure Bag.
i own MER PRFs...price barely moved today
I have to ask why is Goldman Sachs getting a pass on the financials debacle? Are they doing something that different from apparently all their competitors? If, when Bear Stearns collapsed, the fed stepped in, not to save Bear Stearns, but rather, to save the market as a whole from the effects of counter-party risk from a failing BS, then how can investors really think that Goldman is worth $170 a share while simultaneously apparently thinking Lehman, Merrill, Fannie/Freddie, Citigroup, and Morgan Stanley are about ready to kick the bucket? If Lehman did fail, if Merrill quickly followed suit, wouldn't that represent a whole shitstorm of counter-party risk that could also threaten to swamp a Goldman Sachs, or does Goldman hold no trades with these guys that depends on their ability to pay up?
In short, shouldn't we be shorting the F&ck out of Goldman Sachs?
RobT writes:
Is there a reason WCI only had 7 days. Do they have an interest payment or something due?
Investors have called $125M in debt due Aug 4th. WCI only has 70M in cash. They are trying to float some sort of debt swap to stay alive. The outlook isn't good but given that Carl Icahn is Chairman of the Board and that SPF dodged a similar bullet, I wouldn't go shorting WCI--which trades at a whopping $1.30 anyway.
mp,
It shows the fear that is beginning to permeate the market.
Fear.
That is what is destroying the market.
That fear is here is the deathknell of wallstreet.
We might as well begin to face reality.
A massive bailout of homeowners will only occur when the vlaue that has been destroyed is reflected on the surviving borrower debt.
My heloc is only worth 20 cents on the market, then let me pay it off at 20 cents.
Leverage is going to kill a lot of investors.
Of course, my suspicious mind is spinning to try and understand when the next bailout will be announced, putting the shorts back into a vise.
Someday this war's gonna end...
Mike,
"In short, shouldn't we be shorting the F&ck out of Goldman Sachs?"
Maybe you didn't get the memo. GS's chairman runs the treasury. Oh yeah and the gov't just hired more of their senior execs.
Cheers,
You can bet if the housing bill and paulson had rallied the market, it'd have been all over the news.
Got an eerie feeling watching Brian Williams' furtive mention of the stock market falling today. Always had this suspicion that when things get really bad, the press won't tell people what they need to know because the 'panic' bogeyman scares its bosses too much. It also won't be so foolish as to anger viewers with positive stories that will soon be proven false.
The press will simply just shut up.
"...my suspicious mind is spinning to try and understand when the next bailout will be announced, putting the shorts back into a vise."
AllenM, I've been preaching to everyone who would listen to stay out of this market.
What can I say?
I like the Goldman connection as well; I've been looking at them for years trying to figure out what's up... so back to square one, because Paulson is a con artist and no way in hell is Goldman clean!
are you kidding?
You might wish to reconsider your ownership of those prefs.
I understand the countryfried prefs are still trading with a near total uncertain status.
Will BAC bk out the rump CFC?
I bet yes with the mark to market just provided by the MER deal.
Fugly.
Little warning sirens are beginning to sound in the wider economy.
Someday this war's gonna end...
i believe the VIX intraday over 30 wasn't the top of this cycle. we may get a renewed spike to 32 or 33 with a close above 30. what a headfake that would be.
Is it late enough in the day/thread to state that I'll be buying the financials (XLF/UYG) when XLF hits $19.50 and rejects it on an hourly w/ light volume. Mark my words: this is a nice bullish spring. Light volume pullback into a high volume sign-of-strength. Plus added bonus of a doji last Friday that marked the half-way move at $21.00 from $22.50, another $1.50 more marks $19.50. The broad market should reverse with it (I was stopped out of SPY & DIA ultras w/ minor losses today). One other thing: if by some chance the broad market tests its lows this week then this correction is over, period.
This certainly looks bad for John Thain. He was considered to be a very capable chief executive when he led the NYSE. Either he became incredibly stupid overnight, or the bottom is falling out of CDO valuations. My guess is that Merrill never believed that these assets would sell for .15 on the dollar and therefore overestimated their capital adequacy. Now that we have an observable transaction at .15 on the dollar, imagine the marks other banks are going to have to take on their CDOs. This does feel like a death spiral.
I'm sure he would love to have his words back on all the reassurances he has given of the last eight months. His credibility at this stage is zero.
"In short, shouldn't we be shorting the F&ck out of Goldman Sachs"
I get your frustration, but as GS slowly fills up every spot at the Treasury, you end up fighting the guys that re-write the rules to prop up GS. Easier prey out there IMO.
Certain OTC derivatives trade in less liquid markets with limited pricing information, and the determination of fair value for these derivatives is inherently more difficult. Such instruments are classified within level 3 of the fair value hierarchy.
Where the firm does not have corroborating market evidence to support significant model inputs and cannot verify the model to market transactions, transaction price is initially used as the best estimate of fair value. Accordingly, when a pricing model is used to value such an instrument, the model is adjusted so that the model value at inception equals the transaction price. The valuations of these less liquid OTC derivatives are typically based on level 1 and/or level 2 inputs that can be observed in the market, as well as unobservable level 3 inputs. Subsequent to initial recognition, the firm updates the level 1 and level 2 inputs to reflect observable market changes, with resulting gains and losses reflected within level 3.
Level 3 inputs are only changed when corroborated by evidence such as similar market transactions, third-party pricing services and/or broker or dealer quotations, or other empirical market data. In circumstances where the firm cannot verify the model value to market transactions, it is possible that a different valuation model could produce a materially different estimate of fair value.
Accordingly, when a pricing model is used to value such an instrument, the model is adjusted so that the model value at inception equals the transaction price. This valuation is adjusted only when changes to inputs and assumptions are corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, and other transactions across the capital structure, offerings in the equity or debt capital markets, and changes in financial ratios or cash flows.For positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, managements best estimate is used.
"This does feel like a death spiral."
Death Spiral is a Conjure Bag term. I'm firmly convinced that Mish got it from Conjure.
in case anyone hasn't noticed, you can't even get shares to short of the gilded 19. i highly doubt there were that many naked short shares out there for such highly traded stocks.
The firm generally values exchange-traded derivatives within portfolios using models which calibrate to market clearing levels and eliminate timing differences between the closing price of the exchange-traded derivatives and their underlying cash instruments. In such cases, exchange-traded derivatives are classified within level 2 of the fair value hierarchy. OTC derivatives are valued using market transactions and other market evidence whenever possible, including market-based inputs to models, model calibration to market clearing transactions, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. Where models are used, the selection of a particular model to value an OTC derivative depends upon the contractual terms of, and specific risks inherent in, the instrument as well as the availability of pricing information in the market. The firm generally uses similar models to value similar instruments. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit curves, measures of volatility, prepayment rates and correlations of such inputs. For OTC derivatives that trade in liquid markets, such as generic forwards, swaps and options, model inputs can generally be verified and model selection does not involve significant management judgment. Such instruments are typically classified within level 2 of the fair value hierarchy. Certain OTC derivatives trade in less liquid markets with limited pricing information, and the determination of fair value for these derivatives is inherently more difficult. Such instruments are classified within level 3 of the fair value hierarchy.
CONJURE'S CORNER
Conjure says, "WaMu remains on Death Watch."
I understand that GS runs the treasury, but that doesn't really answer my main question, which is, despite owning the treasury, how will GS survive a tsunami of counter-party failure? If the answer really has to do with the fed stepping in to save GS from every bank or IB that will fail, that basically tells me you think the fed will monetize all the bad debt out there.
Which means I should own more gold and oil (if that's possible in my portfolio).
"in case anyone hasn't noticed, you can't even get shares to short of the gilded 19"
Oh yeah. I noticed. And, I also noticed that before the rule I could get shares. I think now anyone with the shorts won't cover because it's tough to get positioned again. I think this rule mutes the rallies, going forward.
mp,
I'm sorry, I would never deliberately plagiarize the Conjure Bag. Please forgive the slip-up and give my regards to Conjure.
Best,
Fair Economist writes:
So basically Merrill would rather have 8.5 billion now than 11 billion in 6 months. That corresponds to being willing to pay a 67% interest rate. Urk.
Fair Economist | 07.28.08 - 8:09 pm | #
That's pretty much it. Sad or what. I can't wait for the CNBC spin job on this....
So much for the lack of direction in Asia last night. Taking another beating on the Nikkei.
Somebody better round up some virgins and get the volcano started....
Rest assured that SEC is on top of this. They'll be making damn sure that all short sales were good and proper.
shanondoah | 07.28.08 - 9:12 pm | #
surely you jest...why would they start now? this whole debacle happened in front of their faces.
ps death spiral is an underwriting term we have used it for over 20 years. However, it is a fitting term for the market currently.
Peconic, Conjure isn't upset about your use of the term. He's upset about Mish's use of the term.
Peconic Bay,
Nice post. Few words. Dead on.
It certianly appears to be a death spiral...as the stock sinks, more moeny is owed to buy even more shares (if this was part of the contract) and then more money has to be extracted to offer more shares. Pretty soon the dilution is certian.
I still cant figure out this move. Im my opinion, ti does not appear focused on survival as far as MER as a going concern, is concerned.
Gee, will there be an investigation of the timing of ML's earnings release and their 'sudden' denuemont.
Class action? Class dismissed!
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.
I would think there would be a correlation as to how all other banks and hedge funds have performed in regard to getting interest rate moves right and knowing (in advance) what The Fed ways going to do with rates.
I would think, Goldman has an inside man and friends that help hedge funds; too bad The DOJ is out of business!
GTT II Advisors finished the quarter with profits in fixed income. The main driver of returns was short positions on the front-end of the U.S. curve, as short-term yields rose on expectations of accelerated interest rate hikes by the Federal Reserve.
Goldman Sachs Hedge Fund Partners II LLC · 10-Q · For 3/31/06
SEC Info - Goldman Sachs Hedge Fund Partners II LLC - 10-Q - For 3/31/06
Death spiral (insurance) - Wikipedia, the free encyclopedia
The Downfall of a California Dreamer
"The F.D.I.C. is still trying to unravel the mess at IndyMac. The tableau of the collapse was shocking, replete with a run on the bank, snaking lines of anxious customers and sober assurances from Washington. Not since the 1980s has an American bank failed so spectacularly."
(FDIC will still be trying to unravel the mess at IndyMac in 2013.)
The Downfall of a California Dreamer - NY Times
But mp, there is sooo much money to be made if you are nimble enough.
I plan to be pretty flat before I go on vacation.
The big pop will be during the explicit war on shorts coming with the perception of 'outlawing' shorts that the SEC enforcement of no naked shorting will cause.
But when that fades...
Someday this war's gonna end...
During a conference call on July 17, Thain said: "Right now we believe that we are in a very comfortable spot in terms of our capital."
Read what he said. RIGHT NOW he was very comfortable.
He didn't promise to stay very comfortable for any period of time...
This is like pouring water on someone that is drowning in the swimming pool.
There's a subtext to the Merrill crash that's pretty interesting. Last Christmas Eve, I had dinner with a former top Merrill broker, now retired. The guy tipped me that Merrill's writedowns that quarter would be double the buzz. I came back and posted it here, and it was dead on.
The stock was like 52 then and the guy had a ton of it. Although he was cursing Stan O'Neil a blue streak on Xmas Eve, I'll bet he hasn't sold a share. There was (and still is) fierce loyalty to Merrill, based on the brand and culture they built and reputation they earned. A lot of it was on the retail side, with the brokers and top clients, and the incredible thing is how many of them still believe, even though they are cursing Merrill every other word.
When you fall this fast, it's bad. But when you fall this fast from a perch of being the people who could be totally trusted to make smart investment decisions for America's wealth elite, well...
@Anonymouse: There may very well be a trading opportunity coming up. But the big problem is forward earnings growth. Where are the big banks & IBanks going to make their money?
If we go through an extended period of asset deleveraging, it may turn into a nasty drought on Wall St.
BTW Murphys coming, and he looks pissed.
"The press will simply just shut up."
The 'liberal media' serve their corporate masters - the wealthy ruling elite of this country and others. Thank god we have the internet and outlets like CR as long as we can keep them . . . make no mistake, efforts by AT&T, VZ etc. to kill net neutrality are an effort to stamp out places like this.
"In short, shouldn't we be shorting the F&ck out of Goldman Sachs"
Nah. Go for a sure thing . . . that rube barely is taking bets against Obama!
Question: is there any way this was already negotiated and planned as part of the previous deal?
Hmm. I'm not much of a gambler . . . I meant to say that barely's willing to bet money Obama will lose to McCain in November, however that is properly phrased in bookie lingo. Taking bets? Placing bets?
dont worry about Merrill stock dilution plan...
its just the
pollution
dilution
solutio
Mr. Beach,
Thx for taking my speculation serious enough for a response.
Here's an exact trading plan for my forecast: the XLF closed 7/16 at its high of $19.42; it gapped up on 7/17 and made a low of only $19.51, leaving a $0.09 gap. Now, even though I said the doji half-way move of last Friday projects down to $19.50, I still suspect the gap of $19.42 will get tested.
So here's how I trade it. I wait until $19.42 is tested, and I set my buy order for $19.51; that way, I'm waiting for the XLF to confirm that it's rejected the gap and comes back up to the breakout point before I buy it, so I'm not catching a bottom (knife) that may be much further down. So I'd buy XLF as it came back up to $19.51 and place my stop underneath that daily low.
Now suppose the XLF makes an intra-day low of $19.25, and I buy it at $19.51 with a stop (sell order) at $19.24 to limit my loss and the XLF makes a new daily low in the $18ish area or lower. Well I'll still wait with another buy order at $19.51 instead of picking a bottom, so it can prove to me that it's rejected the price and is back in its range. All of this is dependent on XLF remaining in a light volume sell-off. Volume is key here. Since XLF hit a high of $23.09 on 7/23, all three subsequent trading days have made lower lows on declining volume, benchmarked into the 7/17 highest volume day ever range. This is what's known as a bullish spring. And I intend to buy it.
Hope that clarifies my speculation for some.
idoc writes:
in case anyone hasn't noticed, you can't even get shares to short of the gilded 19.
Who's your broker? I've had no trouble getting shares of C.
Fidelity. C wasn't one i looked at.
There once was grifter named Thain,
Who's board exacted no pain
When he blatantly fibbed
capitalization he cribbed
and Temasek spared him the cane.
I've heard from other people having trouble shorting at Fidelity. At the big internet sites with lots of daytraders on margin accounts (Ameritrade, Interactive Brokers, etc.) there doesn't seem to be any shortage of shares to short. I tried putting in short orders at Ameritrade above market on Fannie and Freddie just to see if they'd get canceled, but there was no problem.
Anonymouse:
Yeah, that clarifies things nicely.
Now what did you just say?
Yes, I've ordered the book you recommended last week. Geez...
That said, I can't fault your ability to peg things. You've done well.
But do all TA guys/ladies have such difficulty with the English language? It's like having to shop at Sears with all of the signs in Spanglish.
Psst. Quiet with the shorting talk.
People get upset.
mp:
Consider it a badge of honor that someone swipes from you. And now, may I introduce my little friend here...
. . . I call him, "Voodoo Sack".
His origin is a little hazy, but rumor has it he escaped from a hospital biohazard disposal shortly after Milken's prostate surgery; fortunately there was a veterinary clinic directly adjacent.
Paterson and Bloomberg Warn of Huge Deficits
By NICHOLAS CONFESSORE
Published: July 29, 2008
Gov. David A. Paterson and Mayor Michael R. Bloomberg warned on Monday of further deterioration in state and city finances, with each saying that he or his successor would have to grapple with huge budget deficits in the years ahead.
Moore_Inflation_Predictor
Moore Inflation Predictor Chart
The Moore Inflation Predictor (MIP) is a highly accurate graphical representation forecasting the future direction of the inflation rate. It has a 97%+ accuracy rate on forecasting inflation rate direction & turning points. And over 90% of the time the inflation rate falls within the projected "likely" range and 7% of the time it falls within the "possible" range.
<a href="http://img209.imageshack.us/my.php?image=xlf4homedadoc2.png>This one's for homedad43. Hope it helps.
"Leverage is a bitch on the way down"
Banks that will be using Covered Bonds, along with Merrill:
Bank or Credit Union Star Ratings
1st Centennial Bank: Redlands, CA
Fremont Investment and Loan: Anaheim, CA
PFF Bank & Trust: Pomona, CA
Security Pacific Bank: Los Angeles, CA
Anonymouse:
Dude, LOL.
Yeah, I'll read the book.
V-e-e-r-r-r-r-y slowly.
Win-win for MER and Temasek, basically because MER needs the cash and Temasek's earlier purchases don't look so bad now, it was about 50% loss at end of today before this.
Am surprised that Temasek is still buying more common though, shows that they don't think that MER will collapse totally. Could they be wrong this time?
Think that things have changed for the worse in a relatively short time. I do not believe that MER is the only financial that is facing this now.
Interesting Times.
Luna ANOK writes:
Banks that will be using Covered Bonds, along with Merrill:
Fremont Investment and Loan: Anaheim, CA
Didn't think there was anything left of Fremont; they Chapter 11'd and CapitalSource got pretty much everything.
Lehman Hit by Biggest Rise in Debt Yields Since 2000
http://www.bloomberg.com/apps/news?pid=20601109&sid=aqQy1X5mr5GM&refer=home
Interesting article.
Merrill, tell me how my ass tastes!
since no one else is saying it...
BOTTOM!!!
LOL
"We are all bottoms now."
Covered Bonds - anything to try to keep the game going.
What's with Paulson wanting to backstop freddie and fannie by buying common? You think GS must own shares of freddie and fannie?
ipodius: This is like just like a mafia racket without the murder.
Wow. Did you buy into that whole bottom in financials thing or what?
I used to get all flustered about the lying Fed and the big giant mathematical fraud that is financial derivatives. The only brownian motion on wall street these days are in bankers' shorts. I still make snarky comments and do a few photoshop jobs, but I'm working on getting past any idealistic desire for justice or accountability. Now I split my time between speaking for justice and reason and pragmatically running around sheering the stupid f*cking sheep. Don't ya know? Winter is coming.
It probably doesn't matter, but if you want to lob a complaint at the SEC about MER:
Complaints? What to do
idoc
the way I am playing this is keeping my shorts and going long and removing my longs to hedge the bear rallies.
And of course all this solves Merrill's problems for good. Won't be another gaping hole in capital to be filled ever again, right? I mean Merrill will still be around two years from now, right? BTW how much of Merrilly does Temasek now own?
mp writes:
Peconic, Conjure isn't upset about your use of the term. He's upset about Mish's use of the term.
I first heard the term "death spiral" (in the context of terminal/expensive capital raising)from the late Zeev Hed on Silicon Investor back in 2000.
"I first heard the term "death spiral" (in the context of terminal/expensive capital raising)from the late Zeev Hed..."
Well, I guess Conjure is getting all worked up over nothing.
Anonymouse, if you get run over by the terrified unwashed , see me at Luckys. We open at 10:00AM
Temasek is an ancient mayan lost language phrase...
loosely translated, it means
Gold man screws you
Does the MER deal strike anyone as being a bit hasty? The SFW were able to save face, but why did MER want to rush this out the door now? How about that stock action today? 10% down - seems like an insider had the tip off.
So does anyone else feel that the 90% haircut NAB gave to structured credit products might have been the trigger for this flood?? This deal was probably in the works for weeks, but got hurried along with NAB's bombshell. MER probably realized that things are going to get a hell of a lot worse - so they need to grab cash now...
Thoughts?
mp, thanks for your comments, I always enjoy reading you and conjure's take on things along with quite a few others.
homedad43 writes:
Anonymouse:
Yeah, that clarifies things nicely.
Now what did you just say?
Yes, I've ordered the book you recommended last week. Geez...
That said, I can't fault your ability to peg things. You've done well.
But do all TA guys/ladies have such difficulty with the English language? It's like having to shop at Sears with all of the signs in Spanglish.
Allow me to translate for you Dad, what Anonymouse is suggesting is that there is money to be made IN THE SHORT-TERM buying XLF at $ 19.51.
Noting what is on the horizon, feel free to pick your own definition of "Short-Term."
How the Cabal keeps this train-wreck prop'd-up until the end of the year is beyond me......
Shares of Merrill Lynch & Co. Inc. led the financial sector lower, dropping 11.5% amid heavy activity among bearish investors in the options market. The stock hit a 52-week low of $24.26 a share and ended at $24.33 a share, as last weeks brief relief gave way to more insecurity. But options analysts had a hard time pinning down the reason behind the decline, as Mike McCarty, options strategist at Meridian Equity Partners, says there was nothing to explain the pick-up in implied volatility. Same goes for the credit markets, where credit-default swaps of Merrill, which measure the cost of insuring its debt against default, rose to $355,000 to insure $10 million in bonds against default for five years, up from $310,000 Friday, according to Phoenix Partners Group. Heavy bets were made in both August and September options, with more than 11,000 put options changing hands at the September $22.50 strike price. Were starting to see 10% moves as not uncommon on a daily basis, says Chris Rich, Newedge Group senior options strategist.
Bank of America Corp. analyst Michael Hecht increased his forecast for Merrill's full-year loss by 51 percent to $11.55 per share and 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 manages $2.7 billion and doesn't own Merrill shares.This kind of announcement is surprising and a little disheartening.''
Jessica Oppenheim, a Merrill spokeswoman in New York, declined to comment.
Merrill has lost almost 55 percent of its market value this year. The shares fell 12 percent yesterday in New York Stock Exchange composite trading. They were little-changed in after- hours trading.
I'm gonna take a stab at some numbers here.
At 6/30 MER had $16.1 bil in tangible equity, $16.34 in tangible equity per share, and a 1.55% ratio of tangible equity to tangible assets. (Yowsa!!)
So, pro-forma tangible equity (post-offering and write-downs) should approximate (in billions):
$16.1 + 8.5 (stock offering) + 3.5 (sale of Financial Data Services) + 4.43 (sale of Bloomberg stake) - 5.7 (new write downs) - 2.5 (payment to Temasek) = $24.33 billion
(I didn't apply taxes to the asset sales because MER has plenty of NOLs to use up at this point.)
Shares outstanding, assuming a $22 offer price, are 985.4 mil + 386.5 mil = 1.372 bil shares
So, after the dust settles, tangible equity per share actually increases to $17.73/share, and tangible equity to tangible assets increases to between 2.5%-3.0% (depending on how much balance sheet shrinkage takes place), so leverage declines materially.
So, MER is clearly better off after all of these machinations, BUT... the biggest issue is the pricing of the equity offering. Are people willing to pay $22/share after this write-down debacle and what should be a pretty substantial loss of trust (both in MER and the financial group in general)? We'll see. But I can see a bullish case being spun here (not that I'm buying it, of course.)
Of course...that $17.73 tangible book value per share is under the somewhat absurd assumption that the remaining assets are valued properly (which they're undoubtedly not). For example, one could make the argument (as others already have) that the write-down of the sold CDOs isn't done because of the manner of the sale. Also, I don't know how big of a deferred tax asset MER has booked (under the assumption that the company will earn enough to utilize it). So, aside from the remaining Level III assets, there's a lot of potential monkey business in the tangible equity calculation.
Long Mervyn's debt...baby needs a new pair of shoes!
...although the good news is there is no future reset protection for Temasek.
I guess that would be good news for Merrill, and no one else. Certainly not Temasek.
Merrill Lynch bankers now Singapore public servants!
lol - couldn't have happened to nicer people.
stop gum chewing cowboy or you get cane!
Is there a reason WCI only had 7 days. Do they have an interest payment or something due?
They've got a $125M note that is callable, and < $70M in cash.
Me likey likey american boys. You come here cowboy, you pick up rubbish, mmmm me likey that view...
dk, I suspect your suspicions are right. I think that NAB's mark to market made the tide start to go out -and the naked swimmers start to flail about for coverage that isn't there.
I love the description of this (WSJ used the teaser Merrill tries to lance the boil on their online frontpage, an expression that deserves legs:
-snip-
The move was described by a person close to Merrill as an effort to "lance the boil" that has resulted in more than $46 billion in write-downs since June 2007. Dumping the assets for just 22 cents on the dollar will result in a write-down of $5.7 billion. That is an ominous sign for other Wall Street firms and commercial banks trying to get rid of loans and securities in a market flooded with distressed assets.
/-snip-
Sorry--here's the link to the story:
Merrill Aims to Raise Billions More - WSJ.com
I first heard the term "death spiral" (in the context of terminal/expensive capital raising)from the late Zeev Hed on Silicon Investor back in 2000.
robbie | 07.29.08 - 12:47 am | #
It specifically referred to convertible issues where the conversion price wasn't fixed, but instead was tied to the market price of the strike. The cheaper the common gets, the more shares issued at conversion and thus the more the prospective dilution, which further drives down the price of the common, etc.
It's terminal; I don't think I've ever seen the common survive one of these deals.
Merrill's deal with Temasek wasn't a death spiral, since at least they had the choice of whether and when to reset.
That they made the choice to reset speaks volumes, of course.
Yeah - the fix is in!
Buy, buy, buy! Everything only goes up! This is today's scam to prop things up since yesterday's scam (the Bailout Bill) didn't "save" the market. Tomorrow, we'll have a new scam, but that's okay - just buy!
Of course...that $17.73 tangible book value per share is under the somewhat absurd assumption that the remaining assets are valued properly
Dave, by my valuation model, and taking into account what I think their assets are worth, I come up with 11.08 per share. And that's from what I can GUESS now. In the end, they may be worth no more than BSC was and I think that is probably the destination.
I'm just outraged at the management behavior here, and I agree with mp wholeheartedly: for the most part, I am not in this market. The next two quarters are going to be a disaster for most earnings, and we're not even halfway done with the financial sector writedowns and problems. My positions are very surgical right now.
And John Thain is better at playing CEO than Stan O'Neal how?
Temasek purchased 4.4. bn of mandatory preferred convertibles with a 9% annual dividend (due quarterly) senior to common till Oct 15 2010 conversion.
Conversion price at that date was set at 54.20.
They appear to have converted these convertibles into just under 159m shares of common stock.
Another party converted 36m while a third retains mandatories with a future claim to approx 39.4m shares.
Lastly another 1.3bn of shares may be taken up.
Dave... total issuance then is between 580-660 new shares and 620m-700m new shares & converts.
Sorry the preferreds not Temasek...
Dilution is the solution to pollution, not the illegal-immigration-subprime-borrower-houses-for-all-socialist-lending-created-mortgage crisis.
Houses for any and all. Can't afford a 600k house, here's a 1.9% APR interest-only loan for one year (6.9% thereafter). No SS#? Not a problem, here's an ITIN number. No credit? What's the matter? Sign here for your American dream. Have equity? Need an Escalade with 5k custom wheels to impress your friends? Here's a blank check. Just buy a house and can't afford the landscaping? You have 40k in equity! Here's your check. No payments for 5 years. Drop in a pool. Buy a car. It's FREE MONEY! Prices are going up, up, up. Sell it in 4 years and cash out. You can't lose in this pyramid scheme.
White guy with a decent job? I need to see pay stubs, bank statements, IRAs, 403bs, assets. We want to know about everything that you have.
Geez, can I have an ITIN number too?
Bye bye Merrill, we hardly knew ye....and will hardly miss ye
THIS must be the kitchen sink quarter.
I didn't have time to look through all the comments.
However, I see this as a Thain move more oriented to Management then shareholders.
The first comments on this being a "hard money" deal -- I agree totally. They have two moves, this and selling Blackrock. Unless they believe Blackrock is 70% undervalued, then it makes no sense for the shareholders to take the penalty on issuing equity when they could sell assets first.
Thain was named in 4Q 07 -- so any problems hanging around after a year -- he owns. As far as the CDO's, they had a par of more like $30 billion, and have finally been sold a huge discount to par. The pain of writing these down every quarter has become unbearable for Thain. There is very little appetite for these and they took another huge haircut. Even though they financed 3/4 of it, this gets them off Merrill's books either forever or at least for quite a while.
I'm sure that there is an argument for this deal. It's just that I think the order of the moves has more to do with Thain then the economics of the situation. No surprise there.
A lot of this is from reading the press release yesterday, so all my figures are rough estimates/from memory.
MER didn't really sell anything today. It traded it's supersenior CDO posy for a loan to Loan Star backed by the supersenior CDO posy Loan Star now has! Not only that, but the loan is non-recourse. So MER financed 75% of the 'sale' of its supersenior posy, so it's on the hook for that whole 75% financing with no recourse back to Lone Star. So MER is now short the 75% put on the bonds Lone Star is holding for them. From Lone Star's perspective, well, they basically paid $1.675B (25% of $6.7B purchase price) for a call on bonds that originally had a face value of $30.6B. They paid 5.47 cents on the ORIGINAL dollar.
Thain is a smart man but I think that he is not being forthright about what this deal really means. That is just my opinion.
Vega....a good way to look at it.
The economics of the deal suck for MER shareholders. The fact the bonds were written down AGAIN prior to the sale plus Lone Star has the first 25% of the possible remaining losses seems like a good argument that they won't have to be written down AGAIN soon.
I would buy some at 10 cents on the dollar, sight unseen. I dunno what they are, but as long as they aren't all CDO^2 or worse, or the lowest rated tranches, then someone will pay off a loan or two in the entire book.
It would be much better if MER didn't finance it, but Lone Star is taking the riskiest 1/4.
I see it as an accounting driven decision rather then a decision driven by economics. MER absolutely has to book a profit within a couple of quarters, and writing these things down a couple a billion a quarter is just too hard to stomach. For everyone, but especially Thain, who can still blame it on previous management but only for another quarter or two. You only get 3 quarters to blame Stan/previous management.
The bottom for financials will be when either they go bust or something / anything is written up. If they dump every asset at the bottom, then they miss this opportunity and have diluted the hell out of the common.
From an economic perspective, they have lost over the $30 billion on these things -- if you count the dilution.
My guess is that MER will do anything to report some sort of profit in Q4. If that means another huge dump and the sale of Blackrock in Q3, then it will happen.
In less financially stressful environments, I have seen new management write down every thing including the kitchen sink, which, in at least a couple of cases has given them (management) a couple of years to book whatever the hell they want.
Maybe in the future they will talk a little less about capital efficiency (leverage) as a virtue -- but no one is gonna repeal cycles, so it will happen again. Too bad inflection points are so difficult to call with precision.
Oh yea....I'm not saying that MER is going to survive....just that if it happens, they will look so stupid, buying high (stock buybacks in 07) and selling low.