Here is a piece of financial detail you don't often see. On April 3, 2008, Merrill Lynch's CEO, John Thain, stated that the company's balance sheets were looking fine.That means the company had sufficient capital to cover its operating costs.
"We have plenty of capital going forward and we don't need to come back into the equity market," Thain told the Nikkei in an interview published on the Japanese business daily's Web site and dated for Friday, April 4.
This statement followed a dilutive injection of $6.6 billion in new capital by Asian and Middle Eastern investors in 2007.
Unfortunately, a large piece of Merrill's capital ($30.6 billion) was marked to fantasy, not to market.
The soon-to-be-impaired asset consisted of U.S. super senior ABS CDOs (otherwise known as toxic waste - essentially unmarketable mortgage-backed securities). According to a Merrill press release on July 28, 2008, the supposed $30.6 billion asset was unloaded to an affiliate of Lone Star Funds for a purchase price of $6.7 billion. The amount of the loss on the sale of this impaired asset was $23.9 billion.
Note too that this so-called "super senior " debt placed Merrill at or near the first-in-line position to get paid as cash payments worked their way through these mortgage-backed (collateralized debt) assets - with who knows who taking out hefty fees and commissions along the way at various stages of packaging and repackaging - one reason these so-called assets have so quickly become worthless or nearly so.While no two repackaged CDOs are the same, Merrill's difficulties certainly raise the question as to how little - if anything at all - those holding securities further down the line will ever be reimbursed (in this case, for throwing their good money at irresponsible or hapless borrowers and being willing to pay inflated fees to financial gamesmen for the privilege of being taken for much if not all of their invested funds).
Now, here's the interesting part. As recently as June 30, 2008, this so-called asset was carried on Merrill's books at $11.1 billion, according to Merrill's second quarter report. That is, either the market - or Merrill's valuation methods - shifted so rapidly that the toxic asset degraded by a further 39.6% in only 28 days.
Moreover, during a conference call on July 17, Mr. Thain was bold enough to state, "Right now we believe that we are in a very comfortable spot in terms of our capital."
We now have this asset degrading over a period of only 11 days (from July 17 to July 28), not 28 days. That's a loss of roughly 3.6% per day over an 11-day period.
Merrill went on to declare a $5.7 billion total write-down as of July 28. The company now hopes to raise another $8.5 billion by selling stock... a dramatic turnaround from Mr. Thain's position as recently as July 17, 2008.What? Again?
Here is the fundamental problem with bank assets:
The banks say that their assets are worth whatever they want to say they are worth. One only knows what the market will pay when they are unloaded at fire sale prices.
In this case, Merrill's asset was worth 78.1% less than its original book value. Merrill's market value has fallen by almost the same percentage (from the $100 range in January 2007 to the $25 range today.)
Supposedly the credit default crisis is winding down.
What then explains Merrill's 39.6% devaluation of an $11.1 billion asset over the past 11 days alone?
I read today that another analyst has said we are in the seventh inning stretch. If so, then it's either a double header, or this is the world series of bank disclosures.
My call - this is the 7th inning stretch of nothing....
There are a lot more impaired assets out there, and we'll be hearing about them for a long time to come.The truth is, we don't know the real asset value of any of the financial companies exposed to these low quality repackaged financial vehicles. Any number is a guess, and in my view, that is not good enough information on which to base an investment decision - any investment decision!.
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