July 29, 2008 – 3:47 pm

Citigroup, Merrill Lynch and other major brokers delivered second quarter earnings reports that say they should have been out of business by now. Somehow they beat estimates as the SEC sponsored a scam that protected 19 institutions from naked short selling. Coincidentally, their stocks rallied along with the broader market and Fannie and Freddie, which was the point of course.
In order to “beat the Street,” they delivered lower estimates to the analysts following standard methodology. In these endeavors, Citi went an extra country mile to cloud out its damaged assets while Merrill’s CEO, John Thain, once again swore up and down that there would be no need to further dilute shareholder value.

Now that Fannie and Freddie have been bailed out, the game is over and it’s safe for them to unleash the remaining damage that should have been reported in the second quarter filings. 

First, Merrill moved to wipe toxic garbage off the books and replace it with cash:

On Monday, Merrill Lynch agreed to sell $30.6 billion of CDOs, a kind of repackaged debt, to an affiliate of private equity fund Lone Star Funds for just $6.7 billion, or about 22 cents on the dollar.

On Monday, Merrill also said it would take a $5.7 billion third-quarter write-down as it unloads huge amounts of risky debt, and would raise $8.5 billion by selling new stock.

And as soon as Merrill said they would raise $8B, an analyst said he expects Citi to write down a similar amount:

Citigroup Inc may write down about $8 billion in the third quarter from its exposure to collateralized debt obligations (CDOs) after Merrill Lynch & Co agreed to sell its CDOs at a sharp discount, Deutsche Bank analyst Mike Mayo said.

Now that the short squeeze is over, shareholders better run for cover.


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