Monday, July 28, 2008

Merrill takes a(nother) giant writedown

Here's an email I wrote tonight:

How can anyone still believe one word that comes out of these guys' mouths? Merrill's raising another $8.5 billion of capital after pounding the table for six months that not only were they adequately capitalized, they are over-capitalized. Not even two weeks ago Thain said he was comfortable with Merrill's capital position. I don't think we can remotely believe the market value of bank balance sheets. Merrill marked this $30.6 billion notional value CDO portfolio at 36 cents ($11 billion) on June 30th and four weeks later sold it for 21 cents ($6.7 billion). That's down 42% in four weeks!!! This isn't some rounding error position on their balance sheet...and they financed the sale with 75% seller financing, so the true price is really below that! Holy krike! These are remarkable times, I hope everyone is storing this in their memory bank somewhere since there are a ton of lessons in this banking epoch. Crazy.

I don't know when this deleveraging negative cycle will end, but as leverage goes away, bankers (both "i" and "commercial") are going to demand bigger and bigger spreads on loans which is going to continue to put downward pressure on multiples (upward pressure on cap rates), which is going to put pressure on asset values, which is going to put pressure on existing loan prices, which is going to pressure banks' balance sheets, which is going cause further deleveraging, repeat, etc. etc. We may literally be seeing a fundamental change in the way banks are operated for the next generation.

Anyway, here are Thain's quotes. He's either a boldfaced liar or these guys still don't have a handle on what they own and what it's worth (probably more of the latter with a sprinkle of the former).
Thain Quotes on Merrill's Capital Adequacy

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