The Merrill Lynch Diet: Starving Shareholders

7/29 - "First, there was the sale of $30.6 billion of toxic crap for 22 cents on the dollar ($6.7 billion). Merrill had already written this down to $11.1 billion, so that's only another $4.4 billion loss, but it comes only ten days after the firm said it had written everything on the balance sheet down to "market."...Second, Merrill is lending the buyer of the CDOs 75% of the money to buy them, and the only collateral for the loan is the CDOs. This means that although the CDOs are off the firm's balance sheet, it still has 75% of its original exposure to them. So that's another $5 billion the firm could still lose."

"Third, there is the horrifically dilutive equity deal. Eighteen months ago, Merrill's stock was close to $100. Three months ago, it was at $50. Merrill will sell this equity at about $25. That will leave existing shareholders (including me) owning about 75% of the firm."

"Merrill has now taken $46 billion of writedowns (and counting). It has sold a stake of Bloomberg worth $4.4 billion. And it has been forced to sell about a third of itself at firesale prices. That was some expensive mortgage gambling the firm did a couple of years ago."

7/29 - "Oppenheimer's Meredith Whitney notes this would reduce MER's CDOs exposure by $11.1 billion. While MER has significantly diluted existing shareholders, they applaud this purging of assets as an attempt to cut its losses and focus on stabilizing its platform and righting the franchise towards growth. While MER's stock still sells at a premium to book value and is expensive in firm's opinion, they believe the stock is getting closer to fairly valued levels as now the hardest work is behind the company."

"Deutsche Bank notes the move increases shares outstanding by est. 38% and reduces est. run-rate EPS from $4/sh. to $2.80/sh but also eliminates most of the worst vintage CDOs, gets cash up front from monolines (vs. waiting 20-40 yrs.), and keeps book value around $22/share. DB is lowering their price target from $31 to $28 but keeping their Hold rating given an inexpensive valuation...They apply a target multiple of 1.2x to their 2009E book value of $23."

"Citigroup says that in their view the Merrill franchise has a tremendous amount of earnings power that can be unleashed over time through execution. While the real promise of the new management team at Merrill is the potential to unlock this earnings power, the legacy assets proved to be a year-long detour, but that is now behind us...Reiterates Buy and $45 tgt (down from $65 due to dilution) as they expect the sale of highly illiquid mortgage related assets to be a catalyst to refocus on the earnings power of the Merrillfranchise. The overhang that has plagued MER for over a year has finally been removed. Furthermore, the capital raised enhances the quality of Merrill's equity base by significantly reducing the preferred component in exchange for straight common equity."

7/31 - "You really can fool all of the people all of the time (or so it would seem). Writedown after writedown, lies and more lies: and yet, Wall Street believes in the Investment banks. The DJIA was up over 266 points yesterday!...Fool me once, shame on you. Fool me ten times, shame on me." Investors just don't seem to get it yet."

"Yesterday, a further $ 8.55 billion stock sale was announced, including a stock sale to Temasek (an investment company of the Government of Singapore)...Thanks to a downside protection clause, Temasek will be compensated for the nearly 50% loss suffered on their December 2007 ‘bailout investment’ in Merrill Lynch...This is definitely going to set a precedent, as new capital becomes more expensive and comes with many strings attached.

Worse still, as investment banks look to dump toxic CDOs and avoid mortgage related securities, the slowing MBS market is going to result in the unwillingness of banks to lend to the residential housing market in the US.

If you are looking to buy the US Financials, now that the worst is behind us - caveat emptor."