Lynching Merrill: Is It Murder or Suicide?

by: Andrew Horowitz August 05, 2008 | about stocks: MER    

Andrew Horowitz

About this author: By this author:
Become a Contributor Submit an Article
  • Font Size:
  • Print

It is really bad isn’t it? Even as we are being told that all is okay on Wall Street, the banks and brokers are so full of disease it can easily be compared to necrotizing fasciitis. You know, that awful flesh eating disease.

The latest shenanigans by Merrill Lynch (MER) are almost too much to Bear (pun intended) and now we are going to surely continue with a crisis of confidence as it seems impossible for this group to allow the truth to come out when it speaks. Now Merrill is in a jam and it is trying everything to make it seem that all is just fine.

Bill Fleckstein had a few observations on this that just cannot be ignored:

So the question is: What changed in the past couple of weeks to cause a CDO — a package of loans known as a collateralized debt obligation — valued at 36 cents on the dollar to be “sold” last week at 22 cents? What did Thain know about this at the last conference call, and why was it not made clear to folks?

Of course, this is more a consignment sale than a true sale. Merrill is providing 75% financing on a non-recourse basis. That means it’s really receiving about 5 cents on the dollar. It may get the other 17 cents later, or it may get the securities back. In essence, Merrill wrote a put option “down 5 cents on the dollar” and gets a call option to get the other 17 cents.

Essentially, Merrill is putting up the funds to sell of the assets. Does that mean that the super-senior-debt they put up was sold for almost nothing? Why the payoff? What did Lone Star, Temasek or others have on them or even better, why did they unload the debt and lose the potential upside? Are they out of options?

The ugly factor is at an all time high. If Merrill goes down, it will not be because it was murdered, it will be because it kicked the chair out and hung itself.

Jim Jubak’s feathers are in a ruffle over this and he is mad as heck at the way CEO Thain has treated shareholders. The 38% dilution after this deal is appalling and shareholders should really take notice.

The games that are being played are the absolute worst thievery I have ever encountered. How do we invest in an environment in which the rules are continually changing - and we are not getting any of the updates. Something stinks on Wall Street. Perhaps it is the rotting corpses of the brokers that are still walking around like zombies, not knowing that they are already dead.

Jim Jubak on The Disciplined Investor Podcast is HERE.

Disclosure: Horowitz & Company clients do not hold positions (of this crap) as of the time of this writing.

Related Articles

This article has 6 comments:

  •  
    Aug 05 07:36 AM
    If Meredith Whitney said that it was a positive move to get these securities off of the books of MER, then what more do you need?
    They can't just through up their hands and surrender. At least they stepped forward and took some responsibility. Citibank sure isn't.

    To use a better analogy, it doesn't matter who is the manager of the Kansas City Royals - it will be a long time before they make it into the post-season.
    Reply | Link to Comment
  •  
    Aug 05 09:24 AM
    Jeff Miller reckons that Merrill is a great buy and that Thain is doing a great job. I mean, for crying out loud, anyone can make a mistake or two or three or... I actually prefer your reading of the situation.
    Reply | Link to Comment
  •  
    Aug 05 12:56 PM
    What did the President know, and when did he know it?
    Reply | Link to Comment
  •  
    Aug 05 10:47 PM
    Yeah, MER, C, WB, WM, LEH, and MS all are extremely levered still. Sentiment has improved in the market in general, unfortunately realistic bank balance sheets and earnings were not the reason.

    I am buying puts out in Jan, Feb, and MAR 09. Mostly because if these banks survive this coming few months, they won't survive their yearly audit.

    That is my thesis, we'll see if it's right,
    concisetrading.blogspo.../
    Ryan
    Reply | Link to Comment
  •  
    Aug 06 12:05 PM
    Horowitz, I love you. Anybody who can pull off a Scrubs reference so well is a god in my eyes. Train wreck code for Merrill!
    Reply | Link to Comment
  •  
    Aug 09 06:19 AM
    When all is said and done, the banking system in the US won't collapse, the economies of the world will not dissolve into chaos, and this will be just another footnote in history. Traditionally speaking, economic crisises have always looked much worse at the time, than they have proved to be in hindsight.

    Lets face facts - the selloff has been overdone, and the only people baying for blood are those who did not see this coming and have made hefty losses. I feel sorry for you, but that is part of the game. Investing involves risk.

    The situation may not be pretty, and the moves MER is taking to extract themselves out of the mess may equally be unsavoury, but at least they are tackling the problem and working hard to restore shareholder value.

    When all is said and done, I bet almost anything that the SP will at least double this (at present $26) in under two years time.
    Reply | Link to Comment
More Comments on MER ยป
Top Rated Comment Streams:

Numbers are net rating-

See all Top 100 »
More by Andrew Horowitz

Investment Resources
Money Management
Research
Seeking Alpha provides these ads as a service to its leading contributors
Articles on related themes
Investment Banks
Consumer Credit
Insurance
Major & Intl. Banks