Why The Merrill Thing Matters: Domino Write-Down Effect

DealBreaker's Bess Levin reports that Merrill Lynch's bad news this week is contagious:

Emboldened by Merrill's courting of public embarrassment, Citi is likely to post third-quarter write-downs of about $8 billion from its exposure to collateralized debt obligations, according to Deutsche Bank analyst Mike Mayo.

BloggingStocks.com thinks that Merrill CEO John Thain looks pretty bad in the whole thing:

The trouble is this. John Thain, Merrill's CEO, has kept saying that the worst was behind the company. He said he had engined a solution by selling Merrill's stake in Bloomberg and by taking what were supposed to be the lion's share of the writedowns last quarter. Thain's credibility bled out onto the floor late today.

The SEC will get to take something away from today. Merrill's stock began to sell off sharply at about 11 AM. By the end of the day, it was down over 11%. Someone knew something when they should not have.

The stock blogosphere is pretty buzzy with that information, but until more details come out, the most interesting complete story of the day will be the domino effect -- who else will have to follow Merrill Lynch's path this week? Reuters reports that Citigroup may be next.

BANGALORE (Reuters) - Citigroup Inc may write down about $8 billion in the third quarter from its exposure to collateralized debt obligations (CDOs) after Merrill Lynch & Co agreed to sell its CDOs at a sharp discount, Deutsche Bank analyst Mike Mayo said.

The analyst also forecast a third-quarter loss and widened his 2008 loss estimate for Citigroup, the largest U.S. bank by assets.

On Monday, Merrill Lynch agreed to sell $30.6 billion of CDOs, a kind of repackaged debt, to an affiliate of private equity fund Lone Star Funds for just $6.7 billion, or about 22 cents on the dollar.

Comments

[Rog49Thomas]

Here I go again.

Is it against HuffPo policy to mention someone's name in a post.?

Nouriel Roubini has an interesting piece on why the ML sale is less than meets the eye.

Here's a precis http://seekingalpha.com/article/87688-merrill-cdo-deal-how-can-it-book-a-sale

If you're inclined go to www.rgemonitor.com and register (for free) and you can get the original text of his article.

"Super-Senior Tranches of CDOS are worth much less than 22 cents on the Dollar....­"

[joebhed]

Why does it say there are 40 comments?
Where are they?

[philipwitak]

re: "who else will have to follow Merrill Lynch's path this week?"

i don't have deep knowledge regarding all the salient details, but it is my general understanding that once an entity like merrill actually assigns a value to these 'investments,' that action becomes what is referred to as an "observable event" and others in a similar position must also assign value to any similar holdings they possess/control - because there is no other reference available for ascertaining real value under current circumstances [can't mark to market if there is no market]. i googled 'fas 157' and found the reference link below.

http://209.85.141.104/search?q=cache:h6Un7F-Ata4J:www.fasb.org/st/summary/stsum157.shtml+fas+157&hl=en&ct=clnk&cd=1&gl=us&client=safari

[watchTVgetSTUPID]

Socialized welfare for the rich (but only when they need it).
But no social safety net for everyone else (when they need it)

Free trade for the International Corporations
But if Grandma buys her medicine in Canada, she is committing a Federal crime.

See the pattern?
The Golden Rule
He who has the gold makes the rules

[Rog49Thomas]

I've pointed this out before but it seems I should again..

When the typical liberal is whining, you hear things like:

"I can't feed my family." "I can't afford health insurance". "I can't send my kids to college." "My son came back from Iraqistan mentally and physcially destroyed".

Notice the coomon pattern - me, me, me, How selfish!

When a big corporate chieftain (and I won't name any names lest my post be deleted but think of a guy who's recently moved to Dubai) comes before Congress, to advocate some "wise" move (like another unneeded tax cut for the already too wealthy or an unwarranted preference or privilege for some big corporation), he explains how it is good for America.

You never hear him complain about the horrific increase in the price of Veuve Clicot or the cost of tanking up his Learjet.

I think there is a lesson there for all of us.

[Cathexis]

Rog: True -- the lesson is that big Corporate Chieftan's are good at spinning and lying and that you can't tell the difference between a problem that affects individuals and a problem that affects AN individual.

As for "I can't feed my family." "I can't afford health insurance". "I can't send my kids to college." "My son came back from Iraqistan mentally and physcially destroyed" ...

Yeah ... that's whining. The nerve of that person ... bitching just because he can't feed his family. He should fashion bootstraps from his own intestines to allow himself the opportunity to pull himself up! But do it QUIETLY!

(obligatory rolling of eyes)

[Rog49Thomas]

This is a bold replay of the Citibank (John Reed) strategy with bum sovereign debt (mostly Lat Am) long ago.

Prior to Citi's move, all the major banks in the USA (which were technically insolvent due to LatAm lending) pretended their loans were 100 cents on the dollar.

It's the first step in cleaning up the mess - and is preferable to a Japanese style strategy of prolonging the charade for decades.

To work it requires that ML have access to capital.

It seems they do.

(This of course does not exculpate the idiocy of getting into this situation)

[ElkoJohn]

`
and the chickens come home to roost . . .
`

[Rog49Thomas]

I believe the more appropriate image would be pheasants or capons.

This is after all an investment bank.

[The 13 Colonies]

A developing situation which will take much longer than a year to hit the bottom. No good jobs, millions of empty houses, empty bank buildings, dark malls. Good [ or bad ] stuff for a new sci-fi movie. The kind we loved to see in the " good old days ".

[FogBelter]

I would be curious to know what percentage of the Banks and Investment Banks asset base is currently tied up in CDOs, CMOs, and CLOs. Not the dollar amount invested, mind you, because these exotic securities are difficult to give a spot value to. I am only interested in the percentage of exposure to these securities these Banks and Investment Houses currently carry.

My thought is that by knowing how exposed the Banks and Investment Houses are ... and using 22 cents on the dollar model (although I believe that Merrill probably came out on top in that security devaluation price) we can determine the future solvency issues we may be seeing.

These unregulated securities were a HUGE MISTAKE in the long term though very profitable in the short term. I think the American Taxpayer has the right to know the full extent of the bailout bill coming their way ... and it is most certainly coming.

[Rog49Thomas]

The IMF publishes a Global Financial Stability Report.

The 1Q08 report had some macro statistics along with estimates.

They've just released their July update.

(Don't go there is you're easily depressed).

[FogBelter]

Thanks, Here's the link ... very disturbing.

http://www.imf.org/external/pubs/ft/survey/so/2008/NEW072808A.htm

It's going to be a very bumpy ride going forward. A 3.9 global growth rate projected in 2009? Along with inflation? Quite a party ahead.

[Sundialsvc4]

"The Full Faith and Credit of the United States" will save the day.

During the time that you read this post (if you read slowly), the U. S. Government will have "borrowed from itself" well more than $1 million. If you read very slowly, it will have borrowed two or three.

So let's do the numbers. Money DOES come from thin air. At the current "burn rate," it will take about 2,800 minutes to "borrow" all of the money we are talking about here. That's less than two days.

Therefore, eat, drink and be merry. Don't take it all too seriously, because the US Government certainly doesn't. The debt will bounce from balance sheet to balance sheet until another 700-odd page piece of magic legislation is crafted. Then, with the simple strike of a gavel in the Chambers of the United States Senate, the entire number will ... vanish.

This is the New Reality. All these bank-meltdowns, all these "subprime mortgages," all this wringing of hands, will in due time simply ... vanish ... paid-for by the "Full Faith and Credit Of The United States." (FFCOTUS)

Just make sure that you, as an individual, don't get stuck holding the bag. When the mortgage doesn't feel right anymore, just pack your things and walk away. In due time, the FFCOTUS will "pay" it all. The banks don't take your debt seriously (hey, they sold it .. a long time ago), so neither should you. Money For Nothing: it's really here.

[GrainOSand]

Your wit is good , your underlying message speaks of doom. The advice to the distressed home owner made me laugh in its simplicity as a solution for those facing such.

[Rog49Thomas]

The road to thirdworldism is paved with such logic.

Alas, we are well on the way.

[pithy]

I drive around with a bumper sticker that reads "End Corporate Welfare." People have stopped me and actually thanked me for being brave enough to tell the truth.

Socialized loss - as in WE cough up the bucks - Privaitized gains - as in THEY keep the profits made by illicit paper-shuffling.

It's no wonder that greed is one of the seven deadly sins.

Next time one of your "pull yourself up by the boot-straps" friends talks about the HORRORS of universal health care, throw them a curve by bringing up Wall Street!

[Bettysdad]

Being that my GF is an art director, I change bumper stickers at whim.

Right now, the sticker says "Please help the wealthy."

[NicholeWebb]

lol

[Rog49Thomas]

I'm wondering just what kind of American you really are.

Aren't our servicemen and servicewomen fighting in Iraqistan to preserve our way of life?

How dare you denigrate their brave service with such comments.

There is no such thing as corporate welfare.

Such policies are wise policies designed to make America a better place. Those who ask for them are patriots.

But

When someone asks about a decent living wage, or the right to unionize .

Or when some vetean complains about inadqueate medical care.

Or when some bleeding heart liberal whines about food safety or work place safety

Well that's just pure selfishness.

How very very sad.

[Steve13133]

Don't worry, Congress will bail them out with taxpayer money just like Bear Stearns and Fanie Mae and Freddy Mac. Get ready for another inflationary set-to as Congress has the treasury turn on the printing presses 24X7 to cover these bad ops. The crooks get saved at the expense of average Americans who have nothing to do with this fiasco. "Once more unto the inflationary Breach, my friends". Coming up, $5/gallon gas and milk (maybe 7$/gallon).

[Moshe]

The current disconnect between most Americans and the thing the other 6 billion people on the planet like to call "reality" is mind-boggling.

However, ignored or not, things like food, water, safe housing, electricity, honest goverment, etc., really matter, and they are not a given. And if you ignore them long enough you won't have them.

Same with money and financial planning, at the individual, family, state, and national levels.

If you blow your money on the wrong things, you will be bankrupted and won't be able to afford the things you really need in the future.

You can ignore realities like this, for a while, but that doesn't mean reality goes away.

To the contrary, the impact of reality just gets bigger the longer it is ignored.

So FYI my fellow Americans: Start dealing with reality, start saving, stop blowing your money on junk you don't need, work hard, work smart, and make responsible decisions for yourself, your family, and demand that your government do the same.

That is the only way out of our current mess, and back to a better future for all.

[nomadicexpat]

here here .. although some people seem to want to believe we are the center of the world and have a huge amount entitled to us, we've lived beyond our means for awhile ...

gas isnt going up because of speculation, it is going up because china is doubling the number of cars on their roads with regular frequency, and theyre upgrading their diet

actions havee consequences, and people seem to have forgotten that

[Sundialsvc4]

Bah, humbug. Wake up and smell the roses, man!

You work your entire life, slave away, save up and scrimp ... and in less time than it takes you to read this, more money than you ever earned or will ever earn in your entire life will Appear ( *poof!* ), yes you read it right, Right Out Of Thin Air.

This is the reality of Fiat Money: it isn't really real, and nobody really cares. There's always an endless supply of More Of It. And so, even though that creates the occasional "twinge of awkwardness," it Doesn't Really Matter because there's Always More Of It...

Right ... ?

Isn't that right ... ?

... ?

[WorkingClass]

In our system debt is money. Money is loaned into existence. So the more debt we have the more money we have. So everybody should borrow as much as they can get. Right? Then we will all be rich. But there is a problem. When the loaned money is not paid back it disappears back into the void from whence it came. It sounds crazy because it is crazy.

Government is not the problem. Bad government is the problem. Fiat money is not the problem. Debt money is the problem.

[marijam]

Capitalism for the poor, socialism for the rich. Had enough? Vote out all incumbents with more than two terms, no exceptions.

[Moshe]

"Capitalism for the poor, socialism for the rich"

Well said.

Most of us have had quite enough of two sets of rules for those with power and everyone else.

For the common man, the law has become a draconian sword daggling ever more precariously over his head, while the Rule of Law doesn't present any limits at all to those with power who do as they please and ever more arrogantly thumb their noses at our laws and constitution while sticking their other thumb in the eye of the common man, having nothing but contempt for the opinions of the People to which this Nation belongs (i.e., Dick Cheney: "So?").

Those that have so shamefully and contemptiously failed us do not merit continuance in any office of public trust belonging to the People.

Give them the boot with the ballot, and then demand that those that we elect to serve the People enforce the People's Rule of Law, holding all high public officials accountable for knowingly violating our laws and the public trust.

See you in November.

[joebhed]

Reply ALL,

I think somebody up there is yelling about the government printing money or something like that.

And you all seem to think that the financial injustice of the day will be undone with a new Congress.

Sayeth the bankers, those of which you most complain for receiving social capital:
" Allow me to create the nation's money, and I care not who makes the laws".
Do you get that ?

Yes, it is the bankers who create the money out of thin air, and not the government. Pray tell.

After these private banking barons create the money out of thin air, they LEND it ,at interest, to the people of the United States to use for running their economy. Or, growing their economy, if you will.
This goes for BOTH government borrowing, and private.
Not a bad deal, eh?

ALL new money in this country is created as debts to the people and taxpayers.
And, if you don't think THAT is the problem that has you by the short-hairs, well let me know what those new Congress people are going to do.

Thomas Jefferson:
" If the American people ever allow private banks to control the issue of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers conquered.­"
Sound familiar?

[jnratliff]

I agree marijam but I have been saying it for over twenty years.
I moved my money out of merill lynch I just got a call from my banker today saying he received the check. Good timing for once.

[julescator]

Not a smart move. The Banks are in trouble - Merrill Lynch isn't. You may soon regret that move. Good Luck with that.

[11907281]

Why opt for universal heath care when you can have corporate socialism. I think the world needs to stop lending you money until you get your Sh*t together.

[bola47]

mervyn's files chapter 11 today and receives $465 million in debtor financing. the banks just love to throw our money away and ask then ask the government for a bailout.

[11907281]

Why is American style Uber-capitalism the greatest in the world again? I keep forgetting cause on the surface it look like an old con game.