Reuters reports that Merrill Lynch (NYSE: MER) is taking an enormous $5.7 billion write-down on losses from mortgage-backed securities (MBSs) and plans to raise $8.5 billion.
The biggest shocker was, as Reuters reports, that Merrill signed a contract with Singapore's Temasek, a sovereign wealth fund, that requires Merrill to pay $2.5 billion under terms of a previous stock sale to Temasek, along with $2.4 billion in required dividends to preferred shareholders. That's because under its previous deal, Merrill had agreed that if it sold shares at too low a price in the future, it would reimburse investors. Temasek has agreed to purchase $3.4 billion -- or 28% of the new offering. In other words, Merrill is paying an extremely high price for its capital.
The second shocker was how much of a write-down Merrill is taking on its portfolio of collateralized debt obligations (CDOs). Private equity fund Lone Star is paying 22 cents on the dollar, or $6.7 billion for CDOs with a stated book value of $30.6 billion. At that rate, the holders of $2 trillion worth of CDOs outstanding earlier this year would need to take a $1.56 trillion haircut if they sold all the CDOs. And I don't think they have nearly enough capital to be able to afford that.
Merrill shares fell 12% in today's market.
Update. Bloomberg News reports that Merrill had already written down the value of the CDOs from $30.6 billion to $11.1 billion -- 36 cents on the dollar. Bloomberg concurs with my calculation that Lone Star is paying 22 cents on the dollar for those CDOs. And the Wall Street Journal reports that Merrill is financing 75% of the purchase -- which means that Merrill is receiving only $2.8 billion net of the financing. Bloomberg also highlights the number of times that former mortgage trader, and Merrill CEO John Thain, has had to take bigger than expected write-downs and raise more capital.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter
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Reader Comments (Page 1 of 1)
7-29-2008 @ 6:54AM
Smooth Jazz said...
No. You are wrong. $30.6B was the "original" value of the CDOs. Merrill had already written down about $19B. The book value of the CDOs was $11B, so the haircut off stated book is 40% not the 78% you suggest. In other words, Lonestar is paying approx 60cents per dollar of book value.