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Monday, July 28, 2008


merrill marks to market?

the marks employed by the national australia bank last week were cause for concern in some quarters, but others pooh-poohed the applicability of these marks to wall street.

dismiss no more -- merrill is selling $30.6bn worth of super-senior CDOs for $6.7bn to lone star. and how bad did they need to sell the stuff?

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.

in other words, merrill is still on the hook for something like $5bn when eventually the assets are marked not to 21 cents on the dollar but zero.

to help offset the massive hit of this desperate sale, merrill will dilute their shareholders, with the considerable multiplier of the ratchet provision of the earlier capital raising from temasek. via bloomberg:

Merrill may sell as much as 356.5 million shares in the offering, the firm said today in a presentation for potential buyers. That represents a 36 percent increase over the number outstanding at the end of June. The price of the new shares will be set tomorrow, according to the presentation.

as one can tell by lone star's ability and desire to get merrill to finance the transaction to a bankruptcy-remote entity, merrill is panicked and the CDOs are worth nothing like $7bn. lone star's actual stake in the venture looks a lot closer to 5 cents on the dollar.

in other words, national australia bank's marks are in fact where we're headed -- this ride, rough as it has been, is about to get a whole hell of a lot faster and scarier. color yves smith disillusioned.

Read that twice. 22 cents on the dollar, and that with 75% financing. So the real price is lower or zero. Take your pick. And the urban legend in finance land (and I was a believer till just now) was that subprime paper had been marked down pretty well, but Alt-A and Option ARM still has a way to go.

a lot of people are just goddamn plain broke at these price levels. wall street is taking some bounding steps toward fulfilling the worst expectations of us all.

UPDATE: the NAB and merrill writeoffs are linked, says yves smith -- but with merrill's valuations spurring NAB's, not the other (and chronologically announced) way around.

The National Australia Bank's shock write-down of $830 million worth of collaterallised debt obligations (CDOs) can now be explained.

It was triggered by a move from struggling US investment bank Merrill Lynch to get rid of billions worth of CDOs in which the NAB was a co-investor.

Merrill's took a decision to sell the CDOs at a written-down value and the NAB had no option but to follow suit. Its larger write-down than Merrill Lynch (90% vs. 78%) reflects its lower ranking of security.

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