July 17, 2008 – 10:43 pm

Merrill Lynch shocked analysts and investors by reporting that it lost $4.6B and took mortgage-related write-downs of $9.8B in the second quarter of 2008. The results bring net losses to $18.65B and write-downs of an unimaginable $47.25B since the housing crisis hit last summer.

The negative revenue resulted from $3.5 billion in write-downs on collateralized debt obligations, a $2.9 billion loss related to hedges bought from bond insurers, a $1.7 billion write-down on the investment portfolio of Merrill Lynch’s U.S. banks, a $1.3 billion write-down related to residential mortgage exposures and a $348 million write-down related to leveraged finance commitments.

Merrill’s loss would have been deeper had it not been for a $91 million gain booked on the declining value of the bank’s own debt. The move, while counterintuitive, is a legitimate quirk of mark-to-market accounting.

In response, the bank began selling off huge chunks of itself in an attempt to sell what remains while it still remains. Among the departing assets is Merrill’s 20 percent stake in Bloomberg. Ironically, the bank has raised $34.4B so far, although its CEO said there would be no need to raise capital.

Subsequent to the end of the second quarter, Merrill Lynch continues to enhance its capital position. Earlier today, Merrill Lynch completed the sale of its 20% ownership stake in Bloomberg, L.P. to Bloomberg Inc., for $4.425 billion, and as part of this transaction has entered into a long-term service agreement. Merrill Lynch is also in negotiations and has signed a non-binding letter of intent to sell a controlling interest in Financial Data Services, Inc. (FDS), based on an enterprise value for FDS in excess of $3.5 billion. FDS is currently a wholly-owned subsidiary of Merrill Lynch and is a provider of administrative functions for mutual funds, retail banking products and other services within Global Wealth Management (GWM). Merrill Lynch has provided Bloomberg Inc. with debt financing and intends to provide debt financing for the FDS transaction on a commercially reasonable basis.

For a brokerage company in the credit crisis there really are no other options. Earnings of any type, let alone those in the credit bubble, will not be seen in our lifetimes, and funds raised in the capital markets are all underwater. Merrill did find itself on the sainted list of not-to-be-naked-short-sold, pointing toward the final deal for the well-connected one. So, until then, Merrill Lynch will continue tearing itself down like the House of Usher just to prop itself up another year, another quarter, one more day if it can be had.

Can Thain & Cabal buy the necessary time with a $1T balance sheet? We just have to wait and see. $1T is a fortress among balance sheets, but at a white hot temperature, the burn rate might be too fast.


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