Tags: merrill | writedown | ahead

Investors See Merrill 10 Times More Likely to Fail

Tuesday, 29 Jul 2008 09:30 AM

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Investors now pay 10 times more money to ward off the risk of a Merrill Lynch default, according to a new Bloomberg News analysis.

The data comes just as Merrill Lynch announced it would take a big new write-down totaling $5.7 billion and issue $8.5 billion in new stock.

The Bloomberg analysis shows the cost of insuring the banking giant's bonds against default using credit derivatives is 10 times higher than a year ago. The analysis tracks the cost of guaranteeing against nonpayment for debt as short as six months and up to 10 years.

It now costs more to insure debt for one year than it does for longer terms, which suggests that investors think things will get far worse, far sooner, Bloomberg News concluded.

The trend underlines the seriousness of Merrill's situation, even as its executives scramble to assure investors that all is well.

Merrill had made a "significant milestone in our risk reduction efforts,'' Chief Executive Officer John Thain told reporters.

Yet the investment bank posted a $4.9 billion loss just two weeks ago, in a quarter in which it revealed $9 billion in writedowns.

Merrill has agreed to sell $30.6 billion of its repackaged debt, known as collateralized debt obligations — generally suspect and subprime mortgages — for 22 cents on the dollar. Private equity fund Lone Star Funds is the buyer.

All this is happening against a backdrop of continuing bad news on Wall Street.

As the U.S. economy grinds to standstill, much depends on some sense of finality after more than $400 billion in writedowns.

Some have estimated that the real final number of writedowns is closer to $1 trillion, but the worst part for investors has been waiting as banks trot out the problems in painful quarterly tranches of several billion at a time.

Soon after the Merrill news, a Deutsche Bank analyst, Mike Mayo, quickly predicted Citigroup is likely to have to write down another $8 billion in bad loans.

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