"Be glad that you're greedy; the national economy would collapse if you weren't"
Mignon McLaughlin
Merrill Lynch reported another write off and major dilution after hours today. One might ask- "Who cares? Banks have been writing staff off for a year already..." However, in my mind this was no ordinary announcement and regardless of what kind of story Wall Street is going to come up with tomorrow- this press release is over loaded with bad news for the whole sector, lot's of it...
Actually, the numbers in my opinion are so ugly, that it does not really matter what analysts say or how much praise will Thain receive for "cleaning up the "messy" balance sheet"- this will go down in history as a textbook example on how and astounding amount of shareholder wealth could be quickly destroyed by the "bonus driven" greed of a chosen few...
http://biz.yahoo.com/bw/080728/20080728006329.html?.v=1
Notable quotes and my comments:
"On July 28, 2008, Merrill Lynch agreed to sell $30.6 billion gross notional amount of U.S. super senior ABS CDOs to an affiliate of Lone Star Funds for a purchase price of $6.7 billion. At the end of the second quarter of 2008, these CDOs were carried at $11.1 billion, and in connection with this sale Merrill Lynch will record a write-down of $4.4 billion pre-tax in the third quarter of 2008"
Read- $30.6B original worth of assets -only $7B sale price- OOOUCH... How about the 40% deterioration in value during the last month????? Holy smoke...
"Merrill Lynch will provide financing to the purchaser for approximately 75% of the purchase price. The recourse on this loan will be limited to the assets of the purchaser. The purchaser will not own any assets other than those sold pursuant to this transaction. The transaction is expected to close within 60 days"
Read- we sold a bunch of paper for very little money and even had to finance it?
"Merrill Lynch executed an agreement to terminate all of its CDO-related hedges with XL. The transaction is expected to close in early August 2008. When the transaction closes, all of Merrill Lynch's CDO-related hedges with XL will be terminated in exchange for an upfront cash payment to Merrill Lynch of $500 million. These hedges had a carrying value of approximately $1.0 billion at June 27, 2008. As a result of this transaction, Merrill Lynch will record a pre-tax loss of $528 million during the third quarter of 2008".
Read- We managed to "LOSE" a ton of money even on our hedges against the losses????? Heh? No comments!
"Merrill Lynch is also in the process of negotiating settlements on certain contracts relating to CDO hedges with MBIA and other lower-rated monolines. If Merrill Lynch were to receive no payments in connection with the settlement of these hedges, the maximum loss Merrill Lynch expects to record would be their current carrying value, $0.8 billion"
Read- MBI and Co guarantees are not worth anything...
...-Gain on completed sale of Bloomberg for $4.425 billion in proceeds -Estimated gain on closing planned sale of a majority of FDS amounting to substantially all of the enterprise value of approximately $3.5 billion, marking remaining stake to sale price. -The offering of 310,000,000 shares of common stock at a price of $27.52 per share (the closing price as of July 25, 2008) for total proceeds of $8.5 billion, less $2.5 billion paid to Temasek in satisfaction of obligations under the reset provision, and including 13.5 million incremental 'if-converted' common shares to reflect the exchange for a new mandatory convertible preferred stock issuance...
Read- Even after selling two of our best assets, we had to dilute existing shareholders by roughly 30-40%... Case closed...
P.S. Anyone calling a bottom on financial stocks needs to make sure he/she has enough "shorts" to hedge the potential losses... I am not quite sure it's over...
