Merrill's credibility and stock take hit
NEW YORK (Reuters) - Merrill Lynch & Co Inc.'s credibility and stock took a big hit on Friday after reports said the biggest brokerage sought to delay billions of dollars of losses on troubled assets by moving them to hedge funds.
Renewed worries about U.S. banks' exposure to subprime mortgage-related assets punished financial stocks across the board on Friday.
Merrill, which does not have a chief executive after the departure of Stan O'Neal earlier this week, led the declines, which knocked about $4.3 billion off its market capitalization.
Merrill had its biggest drop in 18 years, falling as much as 12 pct Friday morning, before the company said that it was not aware of any inappropriate transactions. Merrill's stock closed down 7.9 pct, or $4.91, to $57.28.
Its shares have lost 38.5 percent so far this year, shaving more than $35 billion off its market cap.
"We have increasingly lost confidence in the financials of Merrill, especially after the sudden increase in (collateralized debt obligation) write-downs," Deutsche Bank analyst Mike Mayo said in a note issued on Friday. He cut his rating on Merrill shares to "buy" and said the company might need to find a partner to restore credibility and financial strength.
In the fourth quarter alone, large U.S. banks and brokerages could suffer additional write-downs of more than $10 billion as deteriorating credit trends continue to undercut the value of subprime mortgages and related securities, Mayo said.
The spreads, or the yield premium over U.S. Treasuries investors demand to hold Merrill bonds, widened on Friday. Merrill credit is now trading as low as junk.
Merrill has been in turmoil after an $8.4 billion write-down in the third quarter caused a $2.3 billion loss, the biggest in the company's history. Analysts expect additional write-downs on collateralized debt obligations, with estimates of $5 billion to $10 billion.
ANALYSTS PUZZLED
Already, the company faces a shareholder lawsuit seeking class-action status over the write-downs and legal experts say more could be on the way.
Write-downs at Citigroup (C.N), the No. 1 U.S. bank, could be $4 billion in the fourth quarter, Mayo said. Citigroup shares fell 2 percent, Bear Stearns Cos Inc BSC.N shares lost 5.4 percent, Goldman Sachs Group Inc (GS.N) fell 4.4 percent and Morgan Stanley's (MS.N) shed 5.8 percent.
Meanwhile, analysts are puzzled how Merrill reduced its net exposure to $15 billion from the $32 billion disclosed in its third quarter report, with only $6 billion in write-downs.
Mayo said that leaves the question of how Merrill reduced the other $11 billion.
Janet Tavakoli, a structured finance analyst, said in a note last week that Merrill had asked hedge funds to take its troubled assets for a year in an off-balance sheet credit facility. The effect of such a deal would reduce Merrill exposure to CDOs, but only temporarily. Continued...
