Or: the credulity of equity markets.
(A follow on to our ML short edition, yesterday)
What was most remarkable about Merrill Lynch’s announcement on Tuesday had little to do with the announcement. So it seems, anyway. ML’s stock rebounded 7.89 per cent over the course of the day. Not quite recouping the utterly, totally random, non-insider information based 11.89 per cent decline the day before, but still…
More remarkable yet, the bouncing share price of Citi: up 5.85 per cent. In despite of analysis from top-flight analysts Mike Mayo of Deutsche and William Tanona of Goldman that, pari passu Merrill, Citi was facing a CDO writedown of between $8bn-$16bn.
Comparative proof that the market didn’t know what it was doing, UBS was down 0.84 per cent. UBS, though once chock full of CDO tranches, has written down its holdings to $6.6bn already. A writedown may be forthcoming, but there’s not much left to cut, in other words.
Equity markets seem, of course, to have bought the line that this is a big come-clean for Merrill and Thain. WSJ:
Merrill bites credit bullet.
John Thain’s move to clear the decks at Merrill Lynch sends a message to other financial chiefs: Those losses you have been hoping will go away? Well, they are real.
So surely no more from Merrill.
Quite possibly more.
Merrill retains an $8.8bn super-senior ABS CDO position which is still valued at June 27th levels – 36 cents on the dollar, that is (par $24bn). In other words, based on this week’s 22 cents on the dollar sale, there’s still $3.5bn there in the ML CDO pen which could be written off. Or, if you take Barry Ritholtz’s calculation of the actual valuation – 5.47 cents on the dollar, a writedown of $7.5bn.
The saving grace is that this position is hedged – so for now, Merrill has no need whatsoever to sell it. From Monday’s announcement:
The pro forma $8.8 billion super senior long exposure is hedged with an aggregate of $7.2 billion of short exposure, of which $6.0 billion are with highly-rated non-monoline counterparties, of which virtually all have strong collateral servicing agreements, and $1.1 billion are with MBIA. The remaining net exposure will be $1.6 billion.
Related links
What hath Merrill wrought? – Naked Capitalism