$15 Billion Write Down for Merrill?
Submitted by
CalculatedRisk on Thu, 01/10/2008 - 9:52pm (44 comments)
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Ben Bernanke, having had a few too many Franziskaners at the biergarten, is barreling down the autobahn, swerving away from oncoming traffic and generally trying to stay in control of the vehicle. As the car veers toward the ditch on the side of the road, he turns to you (in the passenger seat) and says "Don't worry. This car's got really good airbags."
Really, I should think he had a few too many of these:
YouTube - pangalactic gargle blaster
Cheers,
ONLY TWO FACTS AN INVESTOR NEEDS TO KNOW:
1 Debate has clearly shifted from "Will there be a recession?" to "How DEEP will the inevitable recession be?"
2 Average historical stock market corrections in a recession, from top to trough, are down ~30%, which will take the DOW down below 10,000.
Disregard the daily machinations and plan accordingly. Period.
$15 billion is 35% of Merrill's book value, even after the $5.6B "Singapore sling".
Jeebus.
If I were Thain, I'd write down everything I could find too, short of bankrupting the company. Mortgage backs, whack'em. Leveraged loans, lynch'em. Bridge loans, burn'em. Alternative investment assets, annihilate'em.
Mark down securities, derivatives, stocks, bonds and commodities, but don't stop there, mark real estate, desks, corporate jets, computers, air rights, employees and if possible their families and pets.
Nobody will punish him, shareholders think it is necessary and it positions him to be a hero later.
The whisper number just keeps getting bigger. Merrill reports next week.
I'd like to know how somebody 'whispers' numbers that big... with a stadium rock sound system?
I really don't like this.We still haven't seen the effects of Alt-A and prime resets,or the effects of a weak dollar/high gas prices yet.When I see so many parts of our society (not just the financial system) on the edge of failure and consider the importance of trust in making things work,it scares the crap out of me.is there ANYONE who thinks this administration is competent to take out the garbage?
How big are the C whispers?
Merrill in trouble...is US next?
As Jim Carey warned in "The Mask": 'Hold on to your lug nuts, it's time for an overhaul.'
"Moody's warns on US sovereign rating" is the headline in Financial Times online. The article states:
"The US is at risk of losing its top-notch triple-A credit rating within a decade unless it takes radical action to curb soaring healthcare and social security spending, Moodys warned on Thursday. The warning over the future of the triple-A rating - granted to US government debt since it was first assessed in 1917 - reflects growing concerns over the countrys ability to retain its financial and economic supremacy."
http://ftalphaville.ft.com/blog/2008/01/11/10081/moodys-warns-on-us-sovereign-rating/
"is there ANYONE who thinks this administration is competent to take out the garbage?"
If GWB weren't president, he'd be mowing lawns. No offense intended to groundskeepers and gardeners.
Nikkei down 1.93%
Gold up to 893.10
Silver at 16.15
dollar morribund at below 76.
I said it earlier and I'll say it again...something wick4ed this way comes. (Actually i said these charts stink but that's more dramatic).
Cheers,
And now I must bow out...
Night all
Cheers,
Merrill's $15B Writedown would be 44% of total shareholder equity....
Fugly.
"The US is at risk of losing its top-notch triple-A credit rating within a decade"
Decade my ass. Why would they even bother making that prediction. The credit rating system has less credibility than the GWB administration, if that is possible. Does anybody besides Moody's think Moody's will be around in a decade?
Same thing for the financial system as whole, for that matter. If the Feds don't figure out some amazingly good moves pretty soon, Kunstler is going to start looking very realistic.
albrt,
Totally agree. All those projections don't assume a recession, let alone a depression.
Does anyone really expect the current Merrill shareholders to be around even in 2 years, even with another $15B capital influsion?
The RE markets are just getting warmed up for their dive into the 50% off range.
Anyone who doesn't think that should be out there now, buying up those bargains.
And Banker, I do apologize for not recognizing the BS boss had such a large interest in the company he's capsized.
And, if I may, in this economic environment I think it's ridiculous to distinguish between insolvency and bankruptcy...as if the insolvent somehow were going to walk on water or be healed by conversations with the new god, SWFunds.
These piggery's jumped onto the belt leading to the slaughtering station, and they did it themselves. Why bother to pull them off? They're bacon, and that's all they're worth. Sadly, guys like McNeil took their money in currency instead of getting ringged with albatross stock in the companies they've destroyed.
And it serves their investors right for not running a hot poker into the conference room of their overpaid, worthless appointed boards of directors.
Much worse is coming; much worse. And how do I know? Check out the leading edge blogs. There's not a scent of good news.
GaudiaRay, Leading edge blogs? What is your favorite outside CR? Maybe one more bent towards investing?
Hahverd Econ 101 - "#2 Average historical stock market corrections in a recession, from top to trough, are down ~30%, which will take the DOW down below 10,000."
Do you have a mean and standard deviation to go along with that number?
maybe we will get another asset boom....that would be a whopper eh
w,
The Housing Bubble Blog
and the many regional housing blogs
Those guys were way ahead of the curve, and as they're the ones playing the games, their words and insights are all I've needed to set my sail over the past 2 years.
However, this blog conversation is taking place in a bathtub. The ocean has pandemic flu precursors now expanding like a balloon tied to a helium truck. Today's news in the UK may cause a wake up call. Being strung out in anything save the safest is a huge gamble. Even I, to pick up the free money from the biz I'm in, am very conscious that at any moment the music can stop and the sure profit flips can turn into long term piers as I try to survive and to keep the subs alive, so I can reap the pots of gold by having the only _____'s available during and after the Level 6 event. For more on that, check out FluTrackers - Tracking Infectious Diseases since 2006
FLU Symptoms Influenza Cold Virus Swine Flu 
and if you want the gov's word, Flu.gov
Thanks, I'll check them out.
Fear is good now. As I read these news events and see what is happening in the affluent SoCal county where I live with more than 1 million people. I drive thru commercial areas and every other building is for sale or lease. New buildings are being completed and are advertised for sale. Companies are closing. Then there is the empty retail space and mortgage banking offices. Tons of space. I am going to get into an accident looking at all of the signs. Oh, and large furniture stores closing all over the county, I have counted 5 recently. Small business unemployment has to start moving up, and hours getting reduced.
I saw that Kohls really performed badly with their results, so I went and checked them out today. Normally I start the long process of scouting and eventually buying clothes after Christmas as they slowly mark them down and they get more and more picked over. Today they had a huge selection of clothes with all sizes available and they were marked down 65-80% already. Not the usual 6 or 8 racks of crappy clothes, but probably half of the floor space. The other half of the floor was 30-50% off. Oh and 15% off if you use a Kohl's credit card. Desperation.
There is some large new housing developments in this slow growth county and they are either not selling out or not being finished. But the schools are already built, so the district want to close some older schools and compile the students at the new schools.
If the Fed is prepared to lower interest rates so drastically, why isn't it prepared to take stakes in those financial institutions that have been offering equity on the cheap to foreign investors? Wouldn't that be more confidence-inspiring?
Or (re above), perhaps more pertinently, if the Fed is prepared to continue the TAF (risk-free loans to all and sundry) indefinitely, why won;t it take stakes in banks? Is anonymity of recipient (via TAF) more reassuring to the market than banks "owning up" by name to their multitudinous losses? If Wall Street is prepared to support shares of banks who confess openly, why doesn't the market demand to know who is borrowing surreptitiously?
"The total mortgage market in the United States is roughly $10.4 trillion. Of that, a little over 13 percent, or about $1.35 trillion, is subprime certainly a large sum. Of this, nearly 14 percent is delinquent, meaning late in payment or in foreclosure. Of this amount, about 5 percent is actually in foreclosure, or about $67 billion. Of this amount, according to my friends in real estate, at least about half will be recovered in foreclosure. So now we are down to losses of about $33 billion to $34 billion."
Ben Stein, NYT, Aug 12, 2007
So nice for ML to take one for the team with such a large share of these subprime losses. I didn't know Wall Street firms were so altruistic.
"Nikkei down 1.93%...Gold up to 893.10...Silver at 16.15...dollar morribund at below 76..."
No improvement this morning and most of the European markets down. Would be interesting if all that hype yesterday (50 bps rate cut hint and Countrywise announcement) amounts to nothing more than a little half day short squeeze.
"The US is at risk of losing its top-notch triple-A credit rating within a decade unless it takes radical action to curb soaring healthcare and social security spending, Moodys warned on Thursday."
I can see a statement calling for 'radical action to balance its budget' but for Moody to single out specific spending, such as Social Security, is completely inappropriate. Do they have any credibility left to lose?
Instead of calling for cutting Social Security, why doesn't Moody's call for single payer health care and an increase in the inheritance tax? That would do much more to ensure the long term fiscal balance. If Moody's gets into the business of dictating specific budgetary policy from the position of an ideological agenda, while holding the credit rating as a threat, then they will need themselves to be reformed. Moody's should not add the tremendous damage they have already done to the retirement security of Americans.
But amazingly even though Ben drives straight thru the crash barrier in a ball of flames he does personally survive.
YouTube - Worst Drag Racing Accident
Everything around him though is totally destroyed.
"The US is at risk of losing its top-notch triple-A credit rating within a decade unless it takes radical action to curb soaring healthcare and social security spending, Moodys warned on Thursday." - wetzel
Talk about chutzpah!
Couple of off topic stories on new enterpising ways to come up with cash when you are in a pinch.
Will subprime spark an arson boom? - Jan. 10, 2008
Corpse Wheeled to Check-Cashing Store Leads to 2 Arrests - NY Times
Can we still afford this "war" in Iraq and Afghanistan? Wouldn't you like to have that $2 Trillion back about right now?
On Christmas Eve, I posted that this would happen based on a conversation with a Merrill broker who had heard about it then.
CFC-BAC deal was just announced all stock, .1822 BAC shares....CFC down a buck pre market...
who knows what they bought? I don't think BAC has a clue...
I bet it will take less than half a year until BAC reports further multi billion dollar write offs because of CFC's troubled portfolio..
BAC for CFC rumor turned out to be true...
Bank of America to buy Countrywide Financial for $4 billion - MarketWatch
BAC gets CFC for 4 bio in stock - it's not putting up another dime in hard cash. The Feds are fully funding this deal - they must have been desparate to avoid a BK. I wouldn't say BAC has no risk, but $6 bio to become the biggest mortgage lender and servicer in the US sounds like a gamble worth taking to me.
JPM and WaMu are talking. I would imagine WaMu isn't in much better shape than CFC. It looks like the Feds are going to encourage combinations they would have objected to at any time in the past to avoid a major BK.
Atlanta Metro News | ajc.com
Walmart store in Georgia.
400 jobs - 10000 applicants.
"The deal, which Bank of America doesn't expect to impact 2008 earnings excluding items, is expected to close in the third quarter."
Um, if the situation is so stable that it won't effect earnings negatively, why are they getting CFC for $4b? Or does this just mean any large losses will end up within "items?"
I really don't get this. They are taking a huge gamble here and a time of great uncertainty. If I owned BAC because I thought there would be a recovery, I definitely would take my nice capital loss and move into another bank.
Think of the reputational damage CFC has suffered.
The smart move for BAC would have done a Buffet and created a new mortgage unit that guaranteed people the best loan for them.
W (and GaudiaRay):
Check out Dr. Housing Bubble Blog
it's all about SoCal and an excellent read to boot. It's fairly slow moving (2-3 post per week) but it does very nice summaries of the latest goings-on of everything CR, Mish, winter, et'la talk about every day.
Sacramento Land(ing) - Sacramento Real Estate Market Blog - Sacramento Housing Market News and Sacramento Area Flippers In Trouble
are SacTown specific of course (where I grew up and am looking to buy into) but both are also good. Flippers updates every couple weeks to show the worst of the worst in RE losses in Sac.
Any other anyone can suggest? There's a few good blogs concerning Phoenix I believe, but don't follow them myself.
C
wetzel wrote: "Instead of calling for cutting Social Security, why doesn't Moody's call for single payer health care and an increase in the inheritance tax? That would do much more to ensure the long term fiscal balance. If Moody's gets into the business of dictating specific budgetary policy from the position of an ideological agenda, while holding the credit rating as a threat, then they will need themselves to be reformed. Moody's should not add the tremendous damage they have already done to the retirement security of Americans."
Absolutely right, w.! Who the hell is Moody's to be dictating public policy? Unbelievable arrogance, nevermind that those prescriptions are completely wrong.
Ehh! its only digits....01010101010101010101010101010101010
So when does the real money start kicking in???..Oh thats right...we have no real money.
1st Time Poster
I've received many useful insights from CR, Tanta, and others posting here the past few months. Hopefully, a few of you will find this post worth your time.
Given some of the questions asked above regarding recessions and equity indices, some data of possible interest (Hahverd Econ 101, r0m30, and others?) follows:
For each recession since Dec 1969, the following is reported based on monthly averages:
peak S&P 500 value at or before the recession
trough S&P 500 value during or after recession
% change peak to trough
Mar01-Nov01 Recession
Peak Aug00 1517.7
Trough Feb03 841.2
% Change -44.6%
Jul90-Mar91 Recession
Peak May90 361.2
Trough Oct90 304
% Change -15.8%
Jul81-Nov82 Recession
Peak Nov80 140.5
Trough Jul82 107.1
% Change -23.8%
Jan80-Jul80 Recession
Peak Jan80 114.2
Trough Mar80 102.1
% Change -10.6%
Nov73-Mar75 Recession
Peak Dec 72 118.1
Trough Sep 74 63.5
% Change -46.2%
Dec69-Nov70 Recession
Peak Nov68 108.4
Trough Jun70 72.7
% change -32.9%
Most recent peak is Oct07 at 1549.4
Jan 10 value of 1420.3
% change -8.3%
Interesting (to me anyway) how as the "recession odds" amongst the econ chattering class has built towards/past 50% we've seen a near 10% lop off the peak. Consistent with laying about 50/50 odds on a recession and expecting the equity correction associated with recession to be relatively modest given past outcomes.
If we do end up with a recession (seems highly likely to me), it's easy to see S&P 500 falling another 10-15% from Oct07 peak. That type of move doesn't require the 01 bubble burst, or the awful early 70s recession experience again.
I'm thinking its time to violate my "don't try to time the market" rule of retirement investing and exit the equity indices to sit on cash for a while.
Who the hell is Moody's to be dictating public policy?
Krugman has argued that is was Wall Street's power to jack with the nation's finances like this that tied Clinton's hands to some significant extend.
who knows what they bought? I don't think BAC has a clue.
The cute logo! That's the best logo in corporate america.
Someone needs to say something about this! http://www.fakepaycheckstubs.com IS THIS LEGAL? No wonder why we have the subprime mess we have when lenders USE FAKE DOCUMENTATION to help PUSH the loan through Quickly SO THAT EVERYONE DOWN THE FOOD CHAIN (from loan processor to the loan officer to the actual lender) can make the commissions they "WERE" making during the booming 90's!!! Now we are BAILING OUT THESE CROOKS...SOUNDS LIKE the good ol' 1980's Savings and Loan BAILOUT DAYS to me! http://www.fakepaycheckstubs.com see it with YOUR OWN EYES!