Merrill shares rise on $8.55 billion capital increase

NEW YORK (Reuters) - Merrill Lynch & Co Inc MER.N shares jumped nearly 8 percent on Tuesday after the bank agreed to sell a massive debt portfolio at a discount, raising investor hopes it was putting its problems behind it.

Investors shrugged off the fact the bank sold $8.55 billion of shares to help replenish capital after agreeing to sell the $30.6 billion portfolio at a loss and focused instead on the fact Merrill was shedding bad assets. The KBW Bank index rallied over 8 percent as negative sentiment on the financial sector turned on the Merrill deal.

"The market today is kind of giving the deal the thumbs up," said Mike Holland, chairman of Holland & Company, on the rise in the share price.

CDOs have triggered billions of dollars of write-downs for Merrill, as well as for other banks, and some read Merrill's decision to sell the assets as a possible turning point for the financial sector.

"There's always the hope that this might be the last big financial blowup," said Tim Ghriskey, chief investment officer at Solaris Asset Management.

Other banks were also higher on Tuesday, including JPMorgan Chase & Co (JPM.N), up 8 percent, and Citigroup Inc (C.N), up over 5 percent.

The investment bank and brokerage has struggled to raise capital as it has written down assets in its portfolio of debt securities.

On Tuesday, the third largest U.S. investment bank said it sold $8.55 billion of shares at $22.50 each, well below Monday's closing share price of $24.33.

Merrill Chief Executive John Thain had said repeatedly the bank's capital position was adequate.

Selling the collateralized debt obligations will trigger a third quarter write-down of about $5.7 billion, Merrill said on Monday.

The company said it sold 380 million shares and has the option to sell another 57 million.

Merrill's shares rose $1.92 to close at $26.25.

(Reporting by Elinor Comlay, additional reporting by Steven Johnson, editing by Phil Berlowitz and Andre Grenon)