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Thursday, January 17, 2008


merrill writes off $15bn


The writedown included $11.5 billion to account for the plummeting value of subprime mortgages and related bonds called collateralized debt obligations. Merrill also reduced the value of bond insurance contracts by $3.1 billion, saying provider ACA Capital Holdings Inc.'s credit rating had been slashed below investment grade, making it a less-reliable counterparty. It wrote down leveraged loans by $126 million and commercial real estate by $230 million.

With its capital depleted, Merrill said Jan. 15 that it sold $6.6 billion of preferred stock to a group of investors including the Korean Investment Corp., Kuwait Investment Authority and Mizuho Corporate Bank. The transaction followed the sale in December of as much as $6.2 billion in stock. Thain has freed up at least $2.1 billion in additional capital by selling assets, including Merrill Lynch Life Insurance Co. and Merrill Lynch Capital, a financer of medium-size companies.

Merrill held $8.8 billion of subprime mortgages by June and $32.1 billion of collateralized debt obligations, or CDOs, securities packaged from mortgage bonds, loans and other debt.

Many CDOs were downgraded by Standard & Poor's and Moody's Investors Service as an increasing number of borrowers fell behind on home-loan payments, sending prices on some of the securities plunging to as little as 30 cents on the dollar.

this is MASSIVE -- merril reported holding just $38bn in balance sheet equity on september 30. new CEO john thain is hopefully (like his citi counterpart vikram pandit) finally being aggressive on revaluing those CDOs, but merrill is very likely managing writedowns to correspond to its ability to raise new capital to at least feign solvency. writedowns are very probably not over. (an analyst on bloomberg agrees.)

is it bottom forming? merrill is down a couple bucks at the open but above recent lows -- on the worst quarterly report in 70 years, that has to be construed as a short-term positive -- but s&p 1378, the most important trading number in the market, is overhead now and any rally will have to move past it.

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