Merrill Lynch

SWFs still interested in financial firms?

Jim Kim — Thu, 21 Aug 2008 12:34:39 -0400

You would think that sovereign wealth funds have had enough of U.S. financial firms. Some of them have taken a real bath. Recall that Singapore's Temasek invested $5 billion in Merrill Lynch eight months ago--only to see the company stagger and its stock plunge. But guess what? It's still investing. Portfolio says the fund invested another $900 million last month, and would like to buy even more. Meanwhile, Chinese and Korean funds were at least willing to consider a stake in troubled Lehman Brothers. We may see some more SWF take the plunge soon, now that the political furor seems to have died down. You can bet they'll be able to drive some hard bargains. Some top banks may strike them as attractive right now on a valuation basis. Current shareholders will be none too pleased if more deals are struck. But sadly they are somewhat used to the abuse.

For more:
- here's the article

Pension view: Risk is good

Jim Kim — Tue, 19 Aug 2008 12:54:16 -0400

We've noted that pensions aren't bailing out on hedge funds and private equity funds. In fact, they continue to embrace them. That has made life a little more of an adventure for some pension overseers. Portfolio profiles Bill Clark, who oversees a $77 billion investment portfolio for New Jersey workers. In search of higher returns, the fund voted to diversify out of stocks and bonds and into alternatives. It has a goal of 19 percent in such vehicles; it's at about 12 percent now. But what has really put Clark "out there" was the decision to invest in Merrill Lynch, Lehman Brothers and Citigroup--only to watch them all tank. The Merrill deal fortunately came with some anti-dilutive provisions that have kept the state from taking a big bath. Clark remains undeterred. His search for alpha continues, though you have to wonder if at some point people in New Jersey will grow uncomfortable.

For more:
- here's the Portfolio article

Merrill Lynch to slash dividend?

Jim Kim — Thu, 14 Aug 2008 20:35:58 -0400

It's no secret that banks are constrained as they try to raise capital these days. Shareholders seem to have borne the brunt of these efforts, to say the least, and there's got to be a limit as to how much abuse they can take. But it looks like dividends may have to be cut by more banks. At Lehman Brothers, the top dogs could eliminate its 17-cent dividend and still not raise a whole lot. But at Merrill Lynch, such a move may be inevitable; it could save nearly $3 billion a year if it eliminated its dividend. Fortune notes that analysts Dick Bove of Ladenburg Thalmann and Brad Hintz of Sanford C. Bernstein have predicted a dividend cut at Merrill Lynch. Obviously, capital remains an issue. We'll see how this plays out.

For more:
- here's the Fortune article

Bill Miller bets on Freddie Mac

Jim Kim — Wed, 13 Aug 2008 08:14:08 -0400

It's fair to say that the financial crisis has been unkind to a lot of value-oriented fund managers. The mindset--by on valuation dips--has proved to be a loser's strategy. Anyone buying on the likes of Bear Stearns, Merrill Lynch and Lehman Brothers on the way down took some big hits. Miller was long on a whole lot of financial stocks, including Citigroup and Countrywide. At one point the Legg Mason Value Trust fund was down a whopping 40 percent. So what's the answer? How can he start a new 15-year streak? In true value fashion, Miller is loading up on Freddie Mac. Fortune reports his fund owns 80 million shares (12 percent of the total). That's up from 15 million shares at the end of last year. Some might call this desperation. We'll see.

For more:
- here's the Fortune article

A look at Merrill's deal on CDSs

Jim Kim — Sun, 10 Aug 2008 09:16:14 -0400

We've heard a lot about how Merrill Lynch's deal with Lone Star valued its collateralized debt obligations at 22 cents on the dollar--and the implications that it might have for Citigroup and others that will likely try to offload their portfolios. The New York Times takes a look at another Merrill Lynch deal, one that seeks to unwind credit default swap positions. The operative number here is 13 cents on the dollar. That's what Merrill's deal with XL Capital values Merrill's $3.7 billion in CDSs. Like CDOs in general, you can't apply this across the industry, but it is indicative of what it will take for banks to offload their CDSs. New York regulators would indeed like other banks to take similar steps. The health bond insurers depends on it.

For more:
- here's the New York Times article

More certainty on toxic credit valuations?

Jim Kim — Sat, 09 Aug 2008 08:54:14 -0400

The truth hurts; at least it can when it comes to valuations of structured credit products. We're seeing a host of activity these days that seems to be placing a more realistic valuation on certain mortgage-related securities, notes the Financial Times. The sale of various residential mortgage-related CDOs by Merrill Lynch to Lone Star set 22 cents to the dollar as a benchmark of sorts. Of course, the composition of the portfolio is the key issue, but 22 cents offers a signpost at least. Meanwhile, Goldman Sachs and Deloitte are conducting a series of structured investment vehicle auctions that many are looking to for clues as to the fair value of such assets. The early indications are that bidding for the most troubled assets are in line with the Merrill-Lone Star transaction. Some assets are faring better. Commercial mortgage-backed securities were sold in the low 80s; real estate CDOs were sold in the high 60s, the FT reports.

For more:
- here's the FT article

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UBS to settle ARS issues for nearly $19.4 billion

Jim Kim — Fri, 08 Aug 2008 12:40:09 -0400

We thought Citigroup might become the poster child for the auction rate securities scandals--yes we can now use that term--given the fact that New York regulators are convinced they destroyed a lot of evidence. But Citigroup's deal to buy back $7 billion in auction rate securities from individuals, along with a $100 million fine, looks like a pittance compared to what UBS will buy back: $19.4 billion worth of securities. That's a huge sum. Merrill Lynch, another big ARS player, has agreed to buy back $12 billion. That Massachusetts was able to extract so much from UBS says a lot about the strength of the case, and the extent of UBS's sales the retail level. This is certainly another black eye for UBS. Recall the tax evasion scandal that is still percolating along. We will likely see similar deals involving other institutions trickle out soon.

For more:
- here's an AP article

Auction rates securities settlements in perspective

Jim Kim — Fri, 08 Aug 2008 07:37:27 -0400

The news that Citigroup and Merrill Lynch will reimburse individual investors burned by auction rate securities to the tune of $17 billion is certainly eye-catching. The New York Times notes that the Citigroup action (Merrill's offer was not part of the settlement) represents "among the largest amounts ever recovered by investors from a single company as a result of regulatory action." Morgan Stanley got in on the act, agreeing to reimburse some small towns in MA. These actions set a precedent of sorts for other banks--Lehman Brothers, JPMorgan Chase, Wachovia, Bank of America and others--that are in similar straights due to their marketing of ARSs. All of this will affect the bottom line, and hopefully it will end the matter. What remains to be seen is whether Citigroup's $100 million penalty reflects a premium over other penalties given the alleged destruction of relevant evidence.

For more:
- here's the article

Merrill Lynch's deal-making prowess at issue

Jim Kim — Thu, 07 Aug 2008 17:10:56 -0400

Merrill Lynch has been beaten up profoundly in the press. Most of the criticism has been pointed at John Thain's several pronouncements that the firm's capital position was solid, which seemed to always precede major capital moves. Now another source of criticism is emerging: his deal-making prowess. Some have questioned the financing Merrill Lynch is providing to Lone Star to buy its CDO portfolio, noting that it amounts to writing a call. The idea is that it has given away the upside while retaining the downside. Fortune now asks why Merrill got so little from its sale of its stake in Bloomberg. It received $110 million in cash for the sale. The rest comes in 10-year and 15-year notes. Merrill is also providing some financing, though the deals are sketchy. Merrill Lynch is not really bargaining from strength. At least we can agree on that.

For more:
- here's the Fortune article

WaMu no longer in need of capital?

Jim Kim — Thu, 07 Aug 2008 17:09:41 -0400

Thanks to Merrill Lynch's John Thain (fairly or not), people tend to be skeptical when they hear from CEOs that their bank's capital ratios look good. So what should one think of rumor-battered Washington Mutual CEO Kerry Killinger's statement to a Fox-Pitt Kelton analyst that thrift's liquidity position is strong? As MarketWatch notes, WaMu has raised cash in several steps in recent months, from the $7 billion raised from Texas Pacific Group and others to the $10 billion raised from tapping the Fed's discount window, the Federal Home Loan Banking system and open market operations. It has accounted for 65 percent of expected losses via set asides and charge offs. So while the losses will keep coming, it may be that its balance sheet is well positioned.

For more:
- here's the article from MarketWatch