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A new type of writedown: monolines hit Merrill’s numbers

Buried amid a rather dismal set of numbers from Merrill Lynch on Thursday, proof positive that the ailing monoline bond insurers have the potential to inflict further pain on the Wall Street banks.

The headline writedown taken by the bank, at $14.1bn, came in (just) shy of the worst of the predictions made earlier this week, though it takes the total value written down last year to about $23bn.

But if Merrill’s troubles were simply what has become standard fare, charges related to ABS CDOs and subprime mortgages, the figures would have been $11.5bn.

But the bank also took “credit valuation adjustments of $2.6bn related to hedges with financial guarantors on US ABS CDOs.”

These amounts reflect the write down of the firm’s current exposure to a non-investment grade counterparty from which the firm had purchased hedges covering a range of asset classes including U.S. super senior ABS CDOs.

What remains unspoken is the identity of said counterparty - but look no further than ACA, downgraded by S&P from A to CCC last month.

The details of the Merrill write-down are in this appendix - which puts the bank’s total exposure via credit default swaps purchased from the monolines as protection for super senior CDOs at $19.9bn, of which $6.7bn is now with a counterparty deemed non-investment grade: ACA.

The other writedowns break down into $9.9bn on ABS CDOs, taking Merrill’s total exposure to $4.8bn, and $1.6bn on subprime residential mortgages, taking the bank’s exposure to $2.7bn.

This entry was posted by Helen Thomas on Thursday, January 17th, 2008 at 13:18 and is filed under Capital markets. Tagged with , . You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.

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Comments

  1. Jan 17   21:00 Posted by pegnu [report]

    “I don’t play golf with anyone, that’s why I tell the truth.”

    What a classic!

  2. Jan 17   16:33 Posted by immobilienblasen [report]

    Moin from Germany,

    thanks for the Cramer link!

  3. Jan 17   16:29 Posted by immobilienblasen [report]

    Moin from Germany,

    thanks for the Cramer link. Is this really him… :-)

    The first clip where he makes sense i have been stumbling on within years…

  4. Jan 17   16:21 Posted by WhenIWereYoung [report]

    Jim Cramer - lol. Huckster, pure and simple.

    Wasnt too concerned when the markets were ramping up to a froth and the fees were pouring in, was he?

  5. Jan 17   16:06 Posted by Aurangzeb Bozdar [report]

    Some interesting HR trivia from the release:
    ‘Total number of full time employees 64,200 (2006: 56,200).
    Excludes 100 full-time employees on salary continuation severance at the end of 4Q06, 200 at the end of 1Q07, 300 at the end of 2Q07, 400 at the end of 3Q07, and 700 at the end of 4Q07.’
    One wonders what this stat might be (both for number of employees and people on salary continuation severance arrangement) at the end of first quarter 2008.

  6. Jan 17   16:00 Posted by pegnu [report]

    so when the SWF bagho^H^H^H^H^H investors invested were they not informed of possible future writedowns? I just can’t understand why they would invest if they had known and if they didn’t know they must be feeling pretty angry at the moment.

    Their motivation in investing is a real mystery to me. They must be taking some kind of geo-political strategic decision to invest without expecting to make money.

  7. Jan 17   15:51 Posted by Carlomagno [report]

    Thx. Scary stuff… IMO further recapitalisations are going to become more difficult: they’ve pretty much rounded-up all the potential bagho^H^H^H^H^H sory, investor and they’d really be scraping the bottom of the barrel to find more. Any further investments from those who have already chipped in are likely to hit thresholds requiring regulatory clearance - which would complicate a lengthen the process. So my take is that the banks are starting to run out of options and better pray that things do not deteriorate much further. Am I right? (And if we add-in significant losses on commercial real estate…)

  8. Jan 17   15:40 Posted by CABS [report]

    The 8K said that they have $32.80 book value after the latest capital injection from Mizuho et al, so not quite toast, but definitiely limping a bit. The CMBX contracts look a lot worse than just 1.3% down though.

  9. Jan 17   15:25 Posted by Carlomagno [report]

    Let’s assume worst case scenario: the monolines go belly-up, all the CDOs, etc is written off, etc. (let’s leave aside the CMBS for the time being). Without looking at the details in that annex, I make that roughly $25bn in additional writedowns. Where does that leave ML? Still standing or out for the count?

  10. Jan 17   15:19 Posted by CABS [report]

    MER declared exposure of $18bn to the commercial property market via loans and CMBS. The positions were written down by just $230m, a rather unimpressive 1.3% hit in the market which has been described as the next subprime disaster.

  11. Jan 17   14:43 Posted by Carlomagno [report]

    Enjoy!

    http://www.cnbc.com/id/15840232?video=624755222

  12. Jan 17   14:06 Posted by Alt-A [report]

    Merrill now leads the banks with its transparency levels. Talking about new write-down’s they have taken a hit of approx 13% of their Alt-A exposure. The total issuance of Alt-A is somewhat similar to Subprime and so far banks have not been including Alt-A in the sub prime category. Could this lead to a yet another type of write down!!

  13. Jan 17   13:57 Posted by pegnu [report]

    more quotes:

    “too dangerous to tell the truth”
    “Do we want the Communists or the Terrorists to own the banks?”

  14. Jan 17   13:53 Posted by pegnu [report]

    apparently Jim Cramer has just been ranting on CNBC about this:

    “great to be rich in America everyone makes $30m by doing nothing”.
    “I could make lots of “money” from what is going on “but I have a conscience”
    “All about commissioning, jamming stupid people to make money”

    can’t wait to see this on youtube :)

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