Skip navigation
Merrill Video Gallery
A replacement for Ken Lewis has yet to be named, with CNBC's Charlie Gasparino.
If Friday's US unemployment data shows a less-than-expected loss of 100,000 jobs, it could cause stocks to rise, Jud Pyl...
“This has become a stock picker’s market within the equity market,” Khuram Chaudhry from BofA Merrill Lynch Global Resea...
“This has become a stock picker’s market within the equity market,” Khuram Chaudhry from BofA Merrill Lynch Global Resea...
Group of 20 financial leaders head to Scotland to firm up a plan to rebalance the world economy. Bonuses may be a topic ...


Current DateTime: 12:52:39 09 Nov 2009
LinksList Documentid: 33482595

Current DateTime: 12:52:39 09 Nov 2009
LinksList Documentid: 24355697

FEATURED QUIZZES


Current DateTime: 12:52:39 09 Nov 2009
LinksList Documentid: 33793611

Current DateTime: 12:52:39 09 Nov 2009
LinksList Documentid: 24890560
  • Winterizing Your Portfolio

      If 2009 was the winter of our discontent, will 2010 be a winter wonderland for investors? A lot depends on the recovery—or lack thereof.

  • Investor's Guide to Real Estate

      Some even say the long-awaited recovery is here. Regardless, buyers and sellers alike can profit from our guide.

  • Alternative Investing

      Stocks and bonds? Sure. But it's a big world out there for investors.

powered by digg
Merrill Writedowns Could Be Watershed For Banks
By: Jeff Cox, , Special to CNBC.com | 29 Jul 2008 | 01:52 PM ET
Text Size

Merrill Lynch's latest effort to shed its subprime debt could set the standard for a final round of writedowns in the financial sector.

Oliver Quillia for CNBC.com
The New York Stock Exchange, downtown New York City.

The battered Wall Street titan's move to sell its collateralized debt obligations (CDOs) at 22 cents on the dollar was viewed by some market leaders as a watershed moment in the billions of writedowns related to bad bets on high-risk mortgages.

With Merrill [MER  Loading...      ()   ] setting the price on the $30.6 billion of the packaged debt vehicles, other banking giants, particularly Citigroup [C  Loading...      ()   ], likely will face pressure to follow suit, analysts said in the aftermath of the company's announcement.

"This was a very painful step that management inevitably had to take," Fox-Pitt securities analyst David Trone said on CNBC. "This is interesting, because Citi has I think an obligation to Wall Street to mark to this level." (See video below.)

Merrill Misery: Is the Bottom Finally Here?

If the remaining banks with massive subprime exposure move forward using Merrill's price on the CDOs, that could led to Wall Street clearing off its vast subprime exposure, getting the worst news out and sending the market off its prolonged bear pattern and onto a higher level.

To be sure, there have been kitchen-sink moments like this in the year since the credit crisis began. But there was sentiment that the bargain-basement price Merrill CEO John Thain set for the subprime debt would be a defining moment.

Stocks rallied off the start and continued to climb as financials were broadly higher, even though Merrill and Citi dipped, and oil continued its slide.

"They've established a benchmark for everyone else," said Michael Cohn, of Atlantis Asset Management. "These guys who have cash waiting on the sidelines for the final puke of these securities are now making phone calls trying to find out who else wants to puke, who else wants to sell at 22 cents on a dollar. There, that's where the bottom hits."

Others reacted positively to the Merrill announcement as well.

Analyst Meredith Whitney at Oppenheimer widened her loss view on Merrill but "applauded" the company's efforts to find reality amid the subprime mess.

"We believe the stock is getting closer to fairly valued levels as now the hardest work is behind the company," said Whitney, who put Merrill's loss at $10.50 a share, an increase from her prior estimate of $8.37.

UBS [UBS  Loading...      ()   ], Bank of America [BAC  Loading...      ()   ] and Credit Suisse [CSR  Loading...      ()   ] also noted the better transparency of Merrill's numbers that will come with the sale but noted that the company paid a high price.

Waiting for Citi

Analysts quickly tried to put a price on what the Merrill move would mean to Citi.

Mike Mayo of Deutsche Bank said he expects Citi to write down $8 billion on its CDOs in the third quarter, applying the Merrill price to Citi's $22.5 billion of net CDO exposure. He also said that Citi's "decision about raising new capital could be closer than we previously thought."

Some viewed the move, though, as a reminder of how much trouble looms ahead because of the subprime mortgage industry collapse.

"It's a process that's working its way through, but we don't think we're near the end of it yet," Steve Hochberg, chief market analyst for Elliot Wave International, said on CNBC. "Bottoms are created when you have the greatest amount of pessimism. It's a little perverse, but I think people need to get scared." (See video here.)

And there is a level of disbelief remaining that the banks are still being completely open about their balance sheets.

"The current environment is not one where people are prepared to give the benefit of the doubt," Gerry Rawcliffe, group credit officer for financial institutions at Fitch Ratings, told Reuters. "There's a broad loss of confidence in banks."

Market pros believe that a full accounting in the banking industry will be an integral part of a market turnaround.

"Merrill basically marked these things to market for a lot of people," Cohn said. "We're actually feeling out a bottom here. Everyone now has to price off of this number with the same similar securities."

Cohn sees a true bottoming and a long-term rebound a few quarters off yet, but said there would continue to be opportunity for cautious investors going forward. He pointed out that stock indexes have not held notable gains over the past decade, making a recovery all the more difficult.

"You've just got to prepare yourself for a good market going forward and just chip away at things that are at fire sale prices. Selected financials you can buy here," he said. "The bottoms of a 10-year market don't happen overnight. It's a painful process."

© 2009 CNBC.com
Tools:
Print EmailAdd This share icon
  • digg share

CNBC HIGHLIGHTS

  • Do free market libertarians really believe what they say about ethics and shareholder value? The Big Money takes a look.
  • Jim Cramer
  • Cramer did the research and found eight stocks that lead the pack. Read on to get his top picks.
  • On the anniversary of the fall of the Berlin Wall, many in the former Eastern Bloc recall communism fondly.
  • Laptop and money
  • Software, biotech firms, even banks are watching a particular Supreme Court argument today.
  • Dow Chemical is building a filter that uses reverse osmosis to purify contaminated H2O.
  • A nascent website aims to make renting high-end dresses as easy as renting a movie.
ADD COMMENTS
Remaining characters


Current DateTime: 10:06:09 09 Nov 2009
LinksList Documentid: 29778428

Current DateTime: 08:52:07 09 Nov 2009
LinksList Documentid: 29779196

Current DateTime: 12:21:54 09 Nov 2009
LinksList Documentid: 29779199

Current DateTime: 08:52:06 09 Nov 2009
LinksList Documentid: 29779198
  Data is a real-time snapshot  *Data is delayed at least 15 minutes
Global Business and Financial News, Stock Quotes, and Market Data and Analysis

© 2009 CNBC, Inc.  All Rights Reserved.
A Division of NBC Universal
Thomson ReutersThomson Reuters