Merrill's Thain Won't Rule Out Further Writedowns

Merrill Lynch Chairman and CEO John Thain told CNBC that the brokerage firm is "very well capitalized" but didn't rule out further writedowns if the value of risky assets continues to decline.


"No one knows what the market will look like in six months," Thain said in a live interview. "But today we have more than enough capital."

Thain also said he had no plans to cut the dividend to shore up the firm's capital.

"We believe we will shortly be back to profitability and be able to earn the dividend," he said. "So we don't want to take the short-term hit of cutting the dividend this time."

Last week, Merrill said it will take a $5.7 billion third-quarter write-downto unload $30.6 billion of risky debt, also known as collateralized debt obligations, or CDOs. The Wall Street investment bank and brokerage also raised $8.5 billion by selling new stock.

The fire sale nature of that deal added to concerns that the global credit crisis, which has already led to more than $400 billion of write-downs and losses at major banks, still has a long way to run.

The moves also raised further questions about the ability of Thain, who only became Merrill's CEO in December following the ouster of Stanley O'Neal, to turn around the firm.

Part I of the Thain Interview

In the interview, Thain defended the recent asset sale, saying that the continued decline in the value of risky debt made it necessary, even though Merrill sold the assets for roughly 22 cents on the dollar.

"These assets that we sold accounted for about 70 percent of all the losses we’ve taken over the last twelve months," he said. "So when we had the opportunity to sell them, and to sell them in a bulk sale, which obviously has a bulk discount price to it, and to raise the capital at the same time, we took advantage of that opportunity because it’s a great risk reduction trade."

He added: "We are much smaller in terms of risky assets, but it’s not zero. And so if asset values continue to fall, particularly mortgage assets, we still have some exposure."

Reaction to Thain's comments was mostly positive.

Part 2 of Thain Interview

“All in all, John Thain is doing a terrific job," Sean Egan, managing director at Egan-Jones Rating Company told CNBC. "He was dealt a very difficult hand...These problems with Merrill Lynch were cast about two or three years ago, and John is probably at the forefront of dealing with the problems.”

Still, Egan said “I didn’t like the comment that he said he had to raise capital because of the sales. You’d like to think that they look at their balance sheets, see what the quality of the assets were, the market value, and then decide and not have it trigger only after they set up a transaction.”

Thain's credibility has been questioned because of statements earlier in the year saying Merrill didn't need to raise more capital.

Earlier in the day, Barry Ritholtz, CEO of Fusion IQ, told CNBC: "My biggest concern is not just that he’s saying things that seem somewhat ambiguous or subject to reversal. But this is going on now for eight or nine months and it seems every month we get a different statement."

The most recent round of capital raising was particularly bruising because of provisions Merrill agreed to when it raised money in December and January. Essentially, the investment bank said it would give the investors in those raisings extra compensation if it later issued equity at a lower price.

That meant that in this offering, more than half the shares or share proceeds will go to prior investors.

Merrill also said it agreed to help bail out bond insurer Security Capital Assurance by agreeing to accept a $500 million cash payment in
exchange for canceling some credit default swaps and ending related litigation.

Merrill said the settlement, together with the potential settlement of other CDO hedges, will result in a $1.3 billion write-down.

Last month, Merrill completed the sale of its 20 percent stake in Bloomberg to the news and financial data company for $4.43 billion. Merrill also said then it was in talks to sell a controlling interest in a unit that provides services to mutual funds, in a deal that values the entire unit at $3.5 billion.

--Reuters contributed to this report.