Finger In The Dike

The ripples of the monoline downgrades have smashed like a tsunami on the shores of Merrill Lynch and Citigroup. The brute force of that impact is now expected to be nearly $2B for fiscal second quarter 2008. Today, Wall Street’s favorite financial cut-down analyst, Oppenheimer’s Meredith Whitney, cut second quarter expectations on write-downs related to the subprime market and bond insurer downgrades:

Whitney said the downgrade of the so-called monoline insurers last month will force Merrill and Citigroup to book more losses. She sees a $2.5 billion writedown for Merrill related its monoline assets and a writedown of $3.6 billion for Citigroup.

Not to be outdone, UB analyst Glenn Schorr sliced and diced with the best Mrs. Whitney could offer and served up a $4.5B estimate of his own:

UBS AG analyst Glenn Schorr today reduced his estimates for Merrill’s second-quarter to a loss of $2.20 from profit of 55 cents, and he predicted $4.5 billion in writedowns. He also cut his price target to $35 from $47 a share.

The problem for most banks in this bubble bust economy is that as losses and acidic debt rise, earnings are nowhere to be found and the capital raising spigot is being turned off too:

“While the stock looks fairly cheap on our numbers, given the challenging earnings backdrop, Merrill’s remaining exposure to troubled asset classes and the potential dilution from capital raises we remain neutral,” Schorr wrote.

So, as the wave comes rushing to crash in on them, the banks sit motionless with a finger in the dike:

“One of the major problems facing many financials today, including MER, is that new equity raised is merely going toward plugging holes in company capital structures and is not going toward funding new growth opportunities,” Ms. Whitney writes.

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