In a quarterly dance routine that's becoming quite familiar -- call it the write-down, capital raising dance -- the Wall Street Journal reports that Merrill Lynch & Co. (NYSE: MER) is planning to sell a $5 billion stake in Bloomberg, the media company, and to cash out of its 49% stake, estimated at $12 billion, in Blackrock (NYSE: BLK).
Why is Merrill doing this? As we've seen over and over again in the last year, banks must maintain specific levels of capital to assets in order to meet regulatory requirements. When a bank reduces the value of its assets, as accounting rules require, the bank writes off the decline in asset values against its capital. In order to maintain a sufficiently high ratio of capital to assets, banks seek to raise capital equal to the amount of the write-down.
Merrill anticipates taking $6 billion in write-downs for the quarter. These could come from its $41 billion in Level 3 assets -- assets valued based on computer models since there is no active market that prices them. Merrill is fortunate to have these stakes available to sell because it will be able to raise capital without diluting current shareholders. Unfortunately, once it sells these stakes, Merrill shareholders will no longer get the earnings stream they generated.
I'm not sure how management at Lehman Brothers Holdings Inc. (NYSE: LEH) has time to run the business. What's more, with all the turbulence, I'm wondering if many of the employees are working mostly on parsing rumors and fine-tuning resumes.
Of course, this week Lehman got rid of its CFO, Erin Callan and president, Joseph Gregory. The company also raised $6 billion, which was quite dilutive. So from Monday to Friday, the stock price plunged from $33 to $25.81.
Yet, by Friday, things were perking up. The stock price shot up 13.7%. Maurice "Hank" Greenberg, the, who is the former CEO of AIG (NYSE: AIG), said he bought shares. This was also the case with BlackRock (NYSE: BLK) and Putnam Investments.
But there was something else: Wall Street was abuzz with buyout rumors.
In fact, according to a report from CNBC, it looks like the senior management team of Lehman is meeting this weekend (which is a rare thing). Are they talking to possible suitors? Or, is it to review the figures for Q2? Both?
Despite all this, the fact remains that Lehman's potential suitors are also distressed. So, even if there is a deal, the valuation is likely to be muted.
But there is an interesting scenario: Blackstone Group LLP (NYSE: BX) as a buyer or major investor. The firm is well capitalized and may want an investment banking platform. Moreover, the firm's cofounders -- Stephen Schwarzman (CEO) and Peter Peterson (Senior Chairman) -- were formerly with Lehman (back in the 1980s).
Barron's [subscription required] summarizes the likely fate of different classes of Auction Rate Securities (ARS) holders -- the $330 billion market for securities that used to reset in weekly auctions before it froze up in February. It reports that If you hold ARSs sold by a municipality or a taxable, closed-end mutual fund you may already have gotten your money back or may do so within weeks. And those holding issues from tax-free, closed-end municipal-bond funds will likely see some money back before long. But others may have a long wait ahead.
I first wrote about this in February and since then, the post has accumulated 4,031 comments. I cannot imagine how difficult it must be for these people to think they had their money in a safe, money-market like fund -- only to discover that they could not get access to their money at all. It appears that many of these ARS holders did not receive a prospectus and were not warned that the auctions could fail.
Meanwhile, here's Barron's prognosis for the different classes of ARS holders:
Municipal Issuers. Issuers like cities and toll roads had about $165 billion of the ARS market. Bloomberg estimates that north of $63 billion of municipal ARS have been refinanced, and that ARS holders were bought out without losing any money. About half of the municipal auctions are working again, with interest rates in the 4% to 5% area.
One of the beneficiaries of the credit crunch is BlackRock, Inc. (NYSE: BLK), which is a mega asset manager. A key part of the business is BlackRock Solutions, which helps firms deal with risk problems and asset impairments. Yes, it's a fast-growing business. For example, BlackRock is managing The Bear Stearns Companies Inc. (NYSE: BSC) complex portfolio.
Well, this week, BlackRock announced its Q1 results. Net income increased 24% to $241.7 million, or $1.82 per share. Revenues were up 29% to $1.3 billion. It certainly helps that BlackRock has $1.364 trillion in assets under management and there is a global platform, which allows for deep diversification.
On the earnings conference call, the firm's CEO -- Larry Fink -- said that his firm is pushing aggressively into distressed assets. He even likes mortgages.
Fink also thinks there will be "dramatic consolidation" in the investment management sector. After all, with the dislocations in the market, there are likely to be choice assets on the market. And, in light of BlackRock's strong performance, the firm will be in a prime position to capitalize on the opportunities.
MOST NOTEWORTHY: Hershey Foods, Genentech and Garmin were today's noteworthy downgrades:
Bernstein downgraded Hershey Foods (NYSE: HSY) to Market Perform from Outperform, citing commodity cost pressures & slowing volume growth.
Thomas Weisel downgraded Genentech (NYSE: DNA) to Market Weight from Overweight after the company reported Q1 results, due to Avastin growth concerns and a lack of meaningful drivers of long-term revenue growth until 2009.
Oppenheimer cut Garmin (NASDAQ: GRMN) to Perform from Outperform on concerns regarding PND pricing and the company's profitability dynamics.
OTHER DOWNGRADES:
Blackrock (NYSE: BLK) was downgraded at Goldman to Neutral from Buy and to Market Perform from Outperform at Wachovia.
A fantastic Barron's [subscription required] interview with Blackrock Inc. (NYSE: BLK) CEO Laurence Fink suggests that the collapse of The Bear Stearns Companies (NYSE: BSC) was aided by hedge funds. But my interview with an industry insider suggests that some hedge funds not only created the collapse, but profited from it through short selling.
Here's an excerpt from the Fink interview:
"The fall of Bear Stearns was a liquidity crisis. It has been rumored that there were hedge funds promoting hostile and negative comments, which accelerated the fear of doing business with Bear Stearns. I believe it would be prudent if the SEC investigated these rumors. Bear Stearns was a very fine institution destroyed by the profiting of a few. In a normalized market, Bear Stearns would have never fallen like this. The rating agencies caused the ultimate fall of Bear Stearns."
This is consistent with what I heard from a Wall Street insider who attended a March 14 speech by President Bush at the Economic Club of New York -- three days before the JPMorgan Chase & Co. (NYSE: JPM) deal to buy Bear at $2 a share. This insider sat at a table next to a New York hedge fund manager and asked him whether he was surprised by the collapse of Bear Stearns. What the hedge fund manager said came as a shock to me: "Bear's collapse didn't surprise me. We've been short Bear for five days. All the hedge funds have been pulling their prime brokerage business from Bear."
BlackRock (NYSE: BLK), which is a top global asset manager, is one of the few that has been relatively unscathed in the financial meltdown. The company avoided such things as subprime securities and was quite conservative with client portfolios.
As a result, BlackRock now has lots of flexibility. So, what to do? Well, the firm has put together an IPO filing for a fund of hedge funds (to raise about $500 million). The offering will be on the London Stock Exchange.
Basically, a fund of hedge funds is a platform where managers invest in various hedge funds. True, the fees can be high, but there are some key advantages, such as diversification and improved due diligence. Besides, BlackRock has proved to be a top-notch operator with understanding complex investments. After all, the firm is helping to deal with the management of a big part of the Bear Stearns (NYSE: BSC) portfolio.
Actually, BlackRock's fund of hedge funds is part of Quellos Group LLC, which the firm purchased last year. In other words, it looks like BlackRock may snag a nice return on this deal.
About a year ago, I had a chance to hear a presentation by Laurence Fink, who is the CEO of BlackRock (NYSE: BLK), which is a mega money manager. Simply put, he was a bit concerned about the markets. With the huge amounts of leverage, he thought that investors weren't getting enough premium for the potential risk.
Yes, it was a good call. And the upshot is that BlackRock has been a stellar performer.
Well, now Fink is more sanguine. In fact, in this week's Barron's [a paid publication], there is an interview with him.
What's his take? First of all, he think investors should dip into equities, such as the big caps that benefit from global growth. Some of his choices include: General Electric (NYSE: GE), Monsanto (NYSE: MON), United Technologies (NYSE: UTX) and Boeing (NYSE: BA).
He also likes high-grade mortgage debt. Basically, the spreads are attractive (and seem to account for the risk levels).
Finally, Fink is bullish on overseas markets, especially commodity-based counties like Brazil.
TheStreet.com's Jim Cramer says we'll finally get real pricing of the hard-to-mark paper.
After months of saying, "Why don't they bring in some pros, do a Resolution Trust and get on with things?" I can't believe that it is actually happening. With the anointing of BlackRock (NYSE: BLK) (Cramer's Take) -- nice short squeeze in that one, buddy -- to parse out or invest in the worst toxicity that is Bear's (NYSE: BSC) (Cramer's Take) portfolio, the Fed/Treasury -- and I reiterate that the Treasury is driving this -- is signaling the beginning of the end of the "hard to mark/hard to trade" component of this nasty bear market in fixed income.
Even as recently as two weeks ago I could not believe this stuff couldn't trade and remained 20 bid and 80 asked, meaning that the gulf between buyers and sellers was just too ridiculous.
Now, with BlackRock, empowered by the government, to dump stuff or parse it out, we are going to get real prices because "something has to happen." Some trades have to occur. All that had happened before this was that Bear inventoried all this bad stuff, having unwound it from funds of its own or taken junk from clients, and we had no idea how to value it.
If you can make money lending money to people who can't afford mortgages, why not make money buying them back. Several former Countrywide (NYSE: CFC) managers have linked up with Blackrock (NYSE: BLK) to set up a firm, Private National Mortgage Acceptance Company, to buy troubled mortgages. According toThe Wall Street Journal the new operation "seeks to raise more than $2 billion to buy distressed mortgages on the cheap, work with borrowers to restructure them, and then resell them as performing mortgages at a profit."
The new venture stinks a bit. The people running the venture learned the business at Countrywide, the source of so much of the pain in the current mortgage crisis and the project makes Blackrock appear to be a firm ready to profit from the misfortune of others. Beyond that, the new company seems like a real money-maker.
The Blackrock-supported mortgage-buying operation will have to be careful when it enters the market. If it buys big packages of home loans and the market keeps falling, the start-up could lose a lot of money. Let's hope so.
Douglas A. McIntyre is an editor at 247wallst.com.
With the price of Thanksgiving dinner up 11% this year over last, the Fed won't help consumers because it's confident that inflation -- as measured by Personal Consumption Expenditures (PCE) will range between 1% and 2%. Meanwhile, Washington is happy to create lucrative business deals for Wall Street -- in the form of arrangements to manage and keep records of its Structured Investment Vehicle (SIV) bailout.
What is the Fed smoking? I don't know any personal consumption expenditures that are growing at 1% to 2%. The price of oil has quadrupled since January 2001 to $99.29 a barrel, gasoline prices are up 40% since last year, airfares have more than doubled -- a flight from Boston to Florida that cost $300 last year is now $700 -- and the dollar has lost 61% of its value since January 2001. I guess the Fed has decided to define PCE in a way that conveniently confirms its pro-inflation interest rate policy.
Meanwhile, the Treasury Department has backed a Super-SIV plan to bail out banks, such as Citigroup Inc. (NYSE: C) which created the $320 billion SIVs industry and invested the proceeds of SIV-issued commercial paper in now-worthless mortgage backed securities (MBSs).
A ruling in Vodafone Group Plc's (NYSE: VOD) favor may cause Apple Inc (NASDAQ: AAPL) to rethink its business model for the iPhone device. The injunction against Deutsche Telekom AG (NYSE: DT)'s T-Mobile unit may force Apple to "unlock" its iPhones, the UK Times reported.
Struggling airline UAL Corporation (NASDAQ: UAUA), along with its unit United Airlines, is struggling, but finding a carrier willing to merge may be a problem, BusinessWeek speculated.
Microsoft (NASDAQ: MSFT) announced yesterday that it fired Chief Information Officer Stuart L. Scott on Friday for violating company policies, although the company did not specify an exact reason for the dismissal, reported the Associated Press.
Laurence Fink, the chairman and CEO of BlackRock (NYSE: BLK), has met with the executive search firm responsible for filling the CEO vacancy at Merrill Lynch (NYSE: MER). Fink is believed to be the leading candidate to become Merrill's CEO, according to the New York Times.
WEBSITES:
GigaOM reported that Google (NASDAQ: GOOG) is kicking off its game-focused advertising initiative later this month, according to inside sources.
Reuters reports that BlackRock (NYSE: BLK) CEO Larry Fink has been offered the job at CEO of Merrill Lynch & Co. (NYSE: MER). I don't think he should take it, but he has two weeks to decide.
Fink started Blackrock, a bond investment firm, and sold half of it to Merrill. It looks to me like he's good at managing bonds and understanding the risks in that sector. But managing Merrill is a much more complex task. If he took the job, he'd have to oversee an army of brokers and investment bankers. And he'd have to deal with the complexities of satisfying a broad range of regulators -- not to mention Merrill's board.
Granted, he might get paid a higher salary than he is now, but moving him out of his comfort zone might not be worth the extra money. We'll soon see whether I'm wrong or right. What do you think?
In a quarterly dance routine that's becoming quite familiar -- call it the write-down, capital raising dance -- the Wall Street Journal reports that Merrill Lynch & Co. (NYSE: MER) is planning to sell a $5 billion stake in Bloomberg, the media company, and to cash out of its 49% stake, estimated at $12 billion, in Blackrock (NYSE: BLK).
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McDonald's continues its coffee crusade
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Google's $1.7 billion YouTube deal going down the tubes?
