Merrill Lynch & Co., the third- biggest U.S. securities firm, will sell $8.5 billion of stock and liquidate $30.6 billion of bonds at a fifth of their face value to shore up credit ratings imperiled by mortgage losses.
Note the phrase: Merrill is selling their bonds for a fifth (that's 20%) of their face value. Can you say fire sale? Or -- and here's the really scary part -- is that what things bonds are actually worth on the open market? Is this the best deal that Merrill can get for them?
Those figures alone should tell you there are some serious problems out there -- as ini systemic issues that will not be easily resolved.
Let's add one more Tums inducing statement. There was a blurb on Bloomberg a few days back that showed where these writedowns were coming from. About 90% are from the US and Europe, with about 10% (roughly) coming from Asia. Think about that for a minute.
Finally, go to the Big Picture right now and read this story and this story. Barry lays it out as only he can.
8 comments:
If you think that a 20% write-down sounds bad, it turns out that this isn't the half of it -- literally!
CNBC is reporting now that while Merrill is reporting the sale at a 20% markdown, they are financing 75% of that sales price!
So while they call it a 20% write-down, they're accepting around 5% of face value in cash and a note for the rest.
Gullibility check: Everyone who thinks that the note includes no provision relating payment to the performance of the underlying CDOs, raise your hands!
(Of course, "20% write-down" should be "80% write-down"....)
I'm sorry for being so dense; but what is the significance of Asia only having 10% of the writedowns?
okielawye --
The underlying idea is this:
There is no reasonable explanation why Asian banks would have bought mortgage- and other asset-backed securities from US issuers that were somehow better or less likely to default than anyone else. That "anyone else" is European and American banks.
So if we think that the bad-quality no-way-they'll-pay bonds are evenly spread among everyone who bought them (and we do), they why would 90% of the write-downs come from US/EU and 10% come from Asia?
The answer is that Asian banking and securities regulation is more lax and these banks are simply refusing to revalue these assets on their books.
Imagine that someone owes you $10. That's an asset for you. If that person goes broke, leaves the country and goes into hiding, what's the chance that you'll see your $10? About zero. But what if you simply refuse to acknowledge that, and keep saying that "I'm going to get $10 soon."
This was a major factor in the Japanese banking crisis in the 1990s.
Asian banks will have to write down these assets eventually, but we have to keep those effects in mind when we look for the "end" to the current credit crunch.
Very OT... yet another gut-clenching item in today's NYT: "The Massachusetts Educational Financing Authority is unable to grant loans to college students this year as it is unable to secure financing due to the condition of the capital markets."
I got to go to grad school courtesy of MEFA's prior incarnations MELA and MCSLA. Now they're just not making loans, period? Jesus.
The nastiest part of all of this is that this process is fundamentally undermining people's faith in the system. If every bank is saying things are fine, then two weeks later making huge right downs and dumping bad bonds, it makes anybody else saying, "all is well," suspect. Reassuring statements have become the trigger to start the run on a bank.
Because all the institutions are losing credibility, they are falling back on the US government to prop them up. They are not only saying that all is fine, but, even if it's not, we'll keep the ones that are too big to fail from failing. This posture invites a dependence on the government here that is deeply unhealthy and promotes the kind of stupid risks we've been seeing.
Basically what it boils down to in my mind is that either you should not let banks become too big to fail by regulating M&A activity, or when they become that big you need to begin regulating them much more closely. Otherwise the public eats all the downside and we get none of the upside.
"either you should not let banks become too big to fail by regulating M&A activity, or when they become that big you need to begin regulating them much more closely"
YES and YES!
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