Wednesday, July 2, 2008

Merrill’s Cut Deeper than Before

Merrill Lynch received a downgrade of sorts from rival Lehman Brothers. Lehman Brothers, who knows a thing or two about how to take and hide write-downs, says Merrill will have to take substantially deeper write-downs than previously thought due to monoliner downgrades. Witness:

Merrill Lynch & Co will likely incur $5.4 billion of write-downs in the second quarter, mainly from its exposure to monolines, said an analyst at Lehman Brothers, who also saw higher quarterly losses at the world’s largest brokerage.

Analyst Roger Freeman raised his write-down view by $3 billion for Merrill, making his estimate the highest among Wall Street analysts. Analysts have till date expected write-downs to range from $3.5 billion to $4.2 billion.

“We did a deeper review of Merrill’s monoline exposures on non-ABS CDO (asset-backed security and collateralized debt obligation) assets… this incremental $1.7 billion of writedowns constitutes the majority of our adjustment,” Freeman said.

But the damage doesn’t end here. Lehman finds fault with Merrill for deeds of its own doing too:

In addition to the monoline write-down, the analyst said he was now incorporating a larger CDO/subprime write-down following a sharp decline in the ABX index over the past few days. ABX, a synthetic index of home equity asset-backed securities tied to credit default swaps, is comprised of risky home loans.

Goldman Sachs also couldn’t resist getting in on the action:

On Thursday, Goldman Sachs and Bernstein Research also predicted deeper write- downs and losses at Merrill. Goldman expects Merrill to write down $4.2 billion during the quarter, while Bernstein pegged it at $3.5 billion. Merrill shares fell 6.7% after the reports and amid a broad decline in financial shares. Merrill is scheduled to report its second-quarter results in mid-July
A Merrill Lynch spokeswoman said the company’s policy is to decline comment on analyst research.

We are not too quick to add the $5.4B to Merrill’s write-down score. We have to keep in mind that everything on Wall Street is a scam, so this new number may be inflated to provide a “we beat the street” celebration when Merrill issues second quarter results.

It makes one wonder… Why would Lehman Brothers or Goldman Sachs provide any cover for Merrill? Because on Wall Street competition is sin and incestuous fee-paying relationships between supposed competitors are the status quo.

On January 12, 2007, Merrill Lynch saw its shares close at an all-time high of $97.02. Last July, after the toxicity of the credit crunch was known, the stock price was nearly $90 ($86.54). Even on May 8 of this year, the stock hovered at $52.71. Why didn’t Lehman or Goldman see fit to tell us what we all knew about Merrill Lynch 20 points ago? Did the risk to investors change just because Ambac and MBIA lost the triple-A ratings that they never should have held? I don’t think so. If you are short Merrill Lynch lower your stop, because a Lehman downgrade of Merrill sounds like a bottom.

There are actions a company takes that undeniably declare that it is ailing, and cutting 4000 jobs is one of them:

Merrill Lynch & Co. (MER) has begun making layoffs at its Australian investment banking division, a person familiar with the situation said Thursday.

Despite booming merger & acquisitions activity in the resources sector, the move shows the Australian investment banking operations of big Wall Street firms can’t remain completely shielded from the credit crisis that has hit their global operations.

The job cuts are a symptom of the company’s condition; the $1.3M spent in the first quarter lobbying on rules governing commodities trading and other issues is an indicator of its broken moral compass:

The company lobbied on legislation that would require greater record keeping and reporting of trades in energy futures, according to an April 21 report filed with the House clerk’s office.

Many members of Congress have blamed “speculation” for the recent run-up in oil prices, which have increased by about 40 percent this year. Several senators have introduced bills that seek to reign in trading in oil and natural gas futures.

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