Merril Lynch(MER) Takes A New $5.7 bn Pre-tax Write-Down in the Third Quarter

Bloomberg wrote today:

Merrill Lynch & Co., the third- biggest U.S. securities firm, will sell $8.5 billion of stock and liquidate $30.6 billion of bonds at a fifth of their face value to shore up credit ratings imperiled by mortgage losses.

Losses on CDOs and the associated hedging contracts have accounted for about $27 billion of the total $41 billion of total writedowns taken by Merrill over the past year. The firm was one of the largest underwriters of CDOs before the credit crisis hit last year, and Merrill was stuck with more than $50 billion of them on its books when buyers fled the market.

The remaining CDOs may be less worrisome to investors. About $7.2 billion of the $8.8 billion left are hedged with "highly rated counterparties", the firm said in the statement.

According to RTTNews, Merrill said it has agreed to sell $30.6 billion of U.S. super senior ABS CDOs to an affiliate of Lone Star Funds for $6.7 billion. At the end of the second quarter, the CDOs were carried at $11.1 billion. Merrill Lynch also said it plans to offer new stock to raise $8.5 billion. The underwriters will be granted option to buy an additional $1.3 billion of common stock to cover over-allotments. Common stock offerings are typically unpopular because they dilute current shareholders.

When Merrill earlier this month sold its 20 percent share of Bloomberg LP, the parent of Bloomberg News, for $4.43 billion, an 11 percent discount to the $5 billion market value. Kathy Lien, A DailyFX.com's Analyst, suspected that Merrill will not sell a such this valuable asset if it doesn't need a new cash. Now, we know that Merrill have not disclosed another $5.7 bn writedown when it reported its earning on July 17 -- it's just twelve days ago. Suddenly, Merrill needs to raise another $8.5 cash by selling shares, now.

Regarding to Merrill's new writedown, Barry Ritholtz, from the Big Picture, was raising some questions:

1. Why did Merrill fail to disclose this write-down to shareholders when they reported on July 17th? The stock was $30.73 then; everyone who bought since then just got totally sandbagged.
2. The Financials traded today as if many people knew this was coming. How much non-public information leaked in advance of this announcement?
3. Who really thinks the worst of the write-downs, share issuance, and dilution is behind us? Anyone? Bueller?
4. Anyone think Financials are cheap? Think they might get cheaper?
5. Who really thinks the Financials have put in a bottom?

Related Posts :

1. Lehman and Merrill Lynch Default Risk Charts
2. Bridgewater warns Bank losses from credit crisis may run to $1,600bn
3. Lehman Lying, Its Crush, and David Einhorn’s Winning

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