Lynching Merrill – Suicide or Murder ?
August 4, 2008 11:58 pm
It is really bad isn’t it? Even as we are being told that all is okay on Wall Street, the banks and brokers are so full of disease it can easily be compared to necrotizing fasciitis. You know, that awful flesh eating disease.
The latest shenanigans by Merrill Lynch (MER) is almost too much to Bear (pun intended) and now we are going to surely continue with a crisis of confidence as it seems impossible for this group to allow the truth to come out when they speak. Now Merrill is in a jam and they are trying everything to make it seem that all is just fine.
Bill Fleckstein had a few observations on this that just cannot be ignored:
So the question is: What changed in the past couple of weeks to cause a CDO — a package of loans known as a collateralized debt obligation — valued at 36 cents on the dollar to be “sold” last week at 22 cents? What did Thain know about this at the last conference call, and why was it not made clear to folks? (For more on the sale, click here.)
Of course, this is more a consignment sale than a true sale. Merrill is providing 75% financing on a non-recourse basis. That means it’s really receiving about 5 cents on the dollar. It may get the other 17 cents later, or it may get the securities back. In essence, Merrill wrote a put option “down 5 cents on the dollar” and gets a call option to get the other 17 cents.
Essentially, Merrill is putting up the funds to sell of the assets. Does that mean that the super-senior-debt they put up was sold for almost nothing? Why the payoff? What did Lone Star, Temasek or others have on them or even better, why did they unload the debt and lose the potential upside? Are they out of options?
The ugly factor is at an all time high. If Merrill goes down, it will not be because they were murdered, it will be because they kicked the chair out and hung themselves.
Jim Jubak’s feathers are in a ruffle over this and is mad as heck at the way CEO Thain has treated shareholders. The 38% dilution after this deal is appalling and shareholders should really take notice.
The games that are being played are the absolute worst thievery I have ever encountered. How do we invest in an environment in which the rules are continually changing – and we are not getting any of the updates. Something stinks on Wall Street. Perhaps it is the rotting corpses of the brokers that are still walking around like zombies, not knowing that they are already dead.
Jim Jubak on The Disciplined Investor Podcast is HERE.
Disclosure: Horowitz & Company clients do not hold positions (of this crap) as of the time of this writing.