John Thain, speaking to Maria Bartiromo on CNBC this afternoon, repeatedly said that Merrill’s $15.5bn loss in the fourth quarter was driven by the significant deterioration in the credit markets in November and “particularly in December.”
Really? Not entirely, according to the assorted data and charts below.
From Meredith Whitney’s Brokers Industry Weekly note sent on Dec 26 (the day Merrill’s books closed for Q4):
This week, the LCDX price index rose for the second straight week by 1.6% week-over-week. The ABX index prices improved for the higher credit rated tranches (AAA to AA) but fell for the lower rated tranches (BBB to BBB-). CMBX index spreads for AAA widened by 26.14 bps to 535 bps and BBB- narrowed by 14.57 bps to 3,542.14 bps. The TED spread narrowed by 11 bps week-over-week to 145.8 bps as of 12/24/2008.
From Whitney’s Dec 19 note:
This week, the LCDX price index recovered from a two-week slide, rising 5.2% week over week. The ABX index prices improved for the higher credit-rated tranches (AAA to AA) but fell for the lower-rated tranches (A to BBB-). The same occurred with the CMBX spreads, as the spreads for AAA to BBB narrowed while the BBB- to BB widened. Credit default swap spreads of the financials narrowed by 11.7 bps on average week over week.
Dec 12 note:
This week, the LCDX price index fell for the second straight week, dropping 2.8% week-over-week to new lows. The ABX index prices for the AAA rose 9% while the BBB- was flat. CMBX spreads narrowed across all grades with spreads narrowing 155 bps on average. The TED spread narrowed by 20.6 bps week-over-week due to lower LIBOR rates. Credit default swap spreads of the financials narrowed slightly by 19.2 bps on average week-over-week.
Dec 5 note:
This week, the ABX index prices fell across all grades with the AAA and AA falling over 10%. The LCDX price dropped 6% to the lowest level since we tracked the data starting in May-2007. CMBX spreads widened slightly out across all grades with the AAA spreads at 1.2x the spread level in the prior week. The TED spread rose by 2 bps week-over-week.
CMBX:
ABX:
(NB: the ABX index is represented as a price, so up is ‘good’. For the CMBX chart, which is a spread, up is ‘bad’. Markit has more historical ABX and CMBX graphs)
All in all, mixed – and is some cases, downright positive.
So what happened in December that’s left such an indelible mark on John Thain’s psyche, then? Zero Hedge posits a basis trade gone horribly wrong, in a similar vein to the trade that hurt both Citadel and Deutsche.
Related links:
Greg Farrell on Merrill Lynch, the collected works – FT via Google
Did Merrill’s trading desk blow up in Q4 – Felix Salmon / Market Movers