Saturday Rant: They are Killing You, But You Keep Voting for Them
While the world and I wait for the shoe to finally drop on this Lehman-KDB deal (Lehman Brothers On the Ropes – KDB Deal May be Ugly, or Not Happen At All) I have been putting together some research to support my supposition that Merrill Lynch is next on the chopping block.
A lot is at stake here, and depending on the terms Lehman is able to secure – assuming they can close a deal at all – Merrill Lynch will have to make some quick decisions regarding their own strategy for shoring up the company portfolio, shedding problem assets, and raising capital with out diluting investor share value unnecessarily.
This list of compounding factors is growing quickly for Merrill Lynch, as illustrated by the following clips that have appeared in print and on the internet in recent weeks:
Merrill Lynch Downgraded to Sell by Goldman Sachs
NEW YORK (MarketWatch) — Shares of Merrill Lynch & Co. were down more than 5% in pre-trading Friday after Goldman Sachs downgraded the bank to sell from neutral. Goldman also added Merrill to its Conviction Sell list, citing valuation and the likelihood of further write-downs.
MER 25.35, -0.86, -3.3%) to report a loss of $5.75 a share compared to its previous forecast of a loss of $4.75 a share.
As of about 8.30 a.m., Merrill’s stock was down 5.23% in pre-trading. The stock fell 7.48% Thursday, closing at $26.21, close to its 52-week low of $22, reached on July 29.
“Merrill currently trades at the highest price-to-book multiple in our large-cap brokerage universe, despite having some of the most significant exposures to troubled assets such as collateralized debt obligations, mortgages and leveraged loans,” said the Goldman note.
Merrill losses wipe away longtime profits
Merrill Lynch’s losses in the past 18 months amount to about a quarter of the profits it has made in its 36 years as a listed company, according to Financial Times research that highlights the extent of the global banking crisis.
Since the onset of the credit crunch last year, Merrill has suffered after-tax losses of more than $14bn as its balance sheet has been savaged by almost $52bn in writedowns and credit-related losses. Since taking over from Stan O’Neal in November, John Thain, Merrill’s chief executive, has sought to shed toxic assets and replenish its balance sheet by raising almost $30bn of capital.
The size of the losses at Merrill and other Wall Street firms underlines the risks of an investment banking model that relied on complex securities and cheap leverage to drive profit growth. Analysts have questioned whether standalone investment banks such as Merrill, Lehman, Morgan Stanley and Goldman will ever top the profit levels reached during the boom in securitisation, leveraged loans and mortgage-backed products.
Federal regulators said Friday that investors who bought risky auction-rate securities from Merrill Lynch & Co. before the market for those bonds collapsed will be able to recover up to $7 billion under a new agreement. Merrill agreed to hasten its voluntary buyback plan by repurchasing $10 billion to $12 billion of the securities from investors by Jan. 2.
New York-based Merrill neither admitted nor denied wrongdoing in agreeing to the federal settlement, which is subject to approval by SEC commissioners. The SEC said Merrill “faces the prospect” of a penalty after completing its obligations under the agreement.
“Merrill Lynch’s conduct harmed tens of thousands of investors who will have the opportunity to get their money back through this agreement,” Linda Thomsen, the agency’s enforcement director, said in a statement. “We will continue to aggressively investigate wrongdoing in the marketing and sale of auction-rate securities.”
The Securities and Exchange Commission’s Division of Enforcement last week announced that a preliminary settlement in principle has been reached with Merrill Lynch… that would enable investors who purchased auction rate securities from the firm to receive a total of up to $7 billion to restore their losses and liquidity.
The preliminary settlement also would require Merrill Lynch to use its best efforts to provide liquidity for approximately $1.5 billion worth of ARS purchased through Merrill Lynch by other business and institutional customers.
The proposed charges involve alleged misrepresentations by Merrill Lynch to thousands of its customers that ARS were safe, highly liquid investments equivalent to money market instruments and cash. Furthermore, Merrill Lynch continued to tout the purported liquidity of ARS to customers despite its awareness of the escalating liquidity risks in the weeks and months preceding the collapse of the ARS market.
“Merrill Lynch’s conduct harmed tens of thousands of investors who will have the opportunity to get their money back through this agreement pending Commission approval,” said Linda Chatman Thomsen, Director of the SEC’s Division of Enforcement. “We will continue to aggressively investigate wrongdoing in the marketing and sale of auction rate securities, and will seek prompt and meaningful relief to auction rate securities investors as a top priority.”
Under the terms of the agreement in principle:
Merrill Lynch faces the prospect of a financial penalty to the SEC after it has completed its obligations under the settlement agreement. A determination as to the amount of the penalty, if any, will take into account, among other things, the extent of Merrill Lynch’s misconduct in marketing and selling ARS, an assessment of whether Merrill Lynch has satisfactorily completed its obligations under the settlement, and the costs incurred by Merrill Lynch in meeting those obligations, including penalties incurred and the cost of remediation.
No later than Oct. 1, 2008, Merrill Lynch will offer to liquidate at par all ARS from individual, charitable, and small business investors with account values up to $4 million who purchased ARS from Merrill Lynch prior to the collapse of the ARS market in mid-February 2008.
No later than Jan. 2, 2009, Merrill Lynch will offer to liquidate at par all ARS from remaining individual and charitable investors, and from small businesses with account values up to $100 million who purchased ARS from Merrill Lynch prior to the collapse of the ARS market in mid-February 2008.
Merrill Lynch will provide certain investors no cost loans that will remain outstanding until the ARS are repurchased or until an investor declines Merrill Lynch’s offer to repurchase the securities at par.
Merrill Lynch will reimburse customers for costs incurred under any prior loan programs the firm provided to its ARS investors.
Merrill Lynch will make whole any losses sustained by any of the investors described above who sold ARS after Feb. 13, 2008, at a loss.
Merrill Lynch will participate in a special arbitration process that the investor may elect, and that will be overseen by the Financial Industry Regulatory Authority (FINRA).
Merrill Lynch will use its best efforts to provide liquidity to its ARS institutional customers and business customers with accounts of more than $100 million by the end of 2009.
Merrill Lynch will not liquidate its own inventory of a particular ARS before it liquidates investors’ holdings in that security.
Merrill Lynch will provide notice to all of its ARS investors of the settlement terms and will establish a telephone assistance line to respond to questions from investors concerning the settlement.
Merrill Lynch will be permanently enjoined from violating the provisions of Section 15(c) of the Securities Exchange Act of 1934, and Rule 15c1-2 thereunder, which prohibit the use of manipulative or deceptive devices by broker-dealers.
The SEC’s investigation is continuing.
Merrill Lynch looking to revise MGM deal terms
Merrill Lynch is examining its contract with Metro-Goldwyn-Mayer’s United Artists as the bank looks to revise the deal on more favorable terms, the New York Post reported, citing sources close to the situation. United Artists… last year secured $500 million financing through Merrill Lynch to fund 15 to 18 movies over the next five years.
Merrill is looking for any event that might trigger a default on the loan and open the door to renegotiations, the paper said citing sources. According to a source, the terms of the original financing agreement were so favorable to United Artists that Merrill and its syndicate of lenders would love to get out of it entirely.
New Credit Hurdle Looms for Banks
U.S. and European banks… face a new challenge: paying off hundreds of billions of dollars of debt coming due.
At issue are so-called floating-rate notes — securities used heavily by banks in 2006 to borrow money… which typically mature in two years – will come due … at a time when banks are struggling to raise fresh funds. That’s forcing banks to sell assets, compete heavily for deposits and issue expensive new debt.
The crunch will begin next month, when some $95 billion in floating-rate notes mature. J.P. Morgan Chase & Co. analyst Alex Roever estimates that financial institutions will have to pay off at least $787 billion in floating-rate notes and other medium-term obligations before the end of 2009. That’s about 43% more than they had to redeem in the previous 16 months….
“It’s going to be a bigger problem now than it was in the first half of this year, but it’s going to continue on for probably at least a nine-month period,” said Guy Stear, credit strategist at Société Générale SA in Paris.
By the end of this year, big banks and investment banks such as… Merrill Lynch & Co and Morgan Stanley… must each redeem more than $5 billion in floating-rate notes.
Stock Slides as Others Mostly Gain
Shares of Merrill… fell 62 cents, or 2.2%, to $27.73 in early afternoon trading. Meanwhile, most other major banks gained. Goldman Sachs Group Inc. rose $3.18, or nearly 2%, to $167.15; Citigroup Inc. advanced 48 cents, or 2.5%, to $19.47; Morgan Stanley rose $1.01, or 2.5%, to $41.84.
Merrill in July reported a $4.6 billion loss for the second quarter and booked $9.4 billion in charges and write-downs from mortgage-backed securities, unprofitable hedge positions and home-loan exposure.
Merrill’s total inflation-adjusted profits between its 1971 listing and 2006 were about $56bn. The $14bn in losses for 2007 and the first two quarters of 2008 equal half of Merrill’s profits since the beginning of the decade.
Keep coming back to YourMortgageOrYourLife.com for more details on the ensuing Credit/Mortgage/Housing crisis facing the nation…
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