Merrill now in shorts' sights as Lehman crumbles

According to the most recent data from the New York Stock Exchange, short interest in Merrill Lynch increased 5.31 percent, to 44.5 million on August 29, compared with 42.3 million on August 15. Over the same period, short interest on average across the NYSE slipped 0.5 percent.

Merrill has a free float of 1.49 billion shares.

THE SHORT MENTALITY

The difficulty for Merrill Lynch is that it has valuable assets that aren't reflected in its share price.

According to a research report from Citigroup on Friday, Merrill's stake in investment manager BlackRock is worth about $9 a share and its wealth management franchise -- the largest by number of brokers and by assets -- is worth $16 per share. Citi analysts attributed an additional $15 per share to the bank's institutional business.

"Merrill Lynch has some very valuable assets, but the same is true of most Wall Street companies," said John Stein, co-founder of FSI Group in Cincinnati, which doesn't own Merrill Lynch shares.

"Shorts have made a lot of money of late, and one thing about Wall Street is when something works, they tend to keep doing it," he added.

As Merrill shares decline, it makes raising any further equity more expensive, noted Stein.

"It may force a strategic decision on to Merrill," he said, noting Lehman was prompted to raise capital following Bear Stearns' takeover, but it came too late to the idea of a strategic partnership.

"I think what's going on with Lehman will likely force Merrill to look for partners sooner rather than later."

(Reporting by Elinor Comlay, additional reporting by Dan Wilchins; Editing by Gary Hill)