Analytical Wealth

So as I'm sure many of you know, Merrill Lynch announced that they're going to write down another $5.7 billion dollars, sell off its CDO investments for $0.22 on the dollar and raise $8.5 billion on new capital.

(From the NY Times):   "Only 10 days after stunning Wall Street with a huge quarterly loss, Merrill Lynch unexpectedly disclosed another multibillion-dollar write-down on Monday and sought to bolster its finances once again by selling new stock to the public and to an investment company controlled by Singapore.

Moving to purge itself of the tricky mortgage-linked investments that have brought the once-proud firm to its knees, Merrill said that it had sold almost all of the troublesome investments, once valued at nearly $31 billion, at a fire-sale price of 22 cents on the dollar.

As a result, Merrill expects to record a write-down of $5.7 billion for the third quarter. Such an outcome could push Merrill into the red for a fifth consecutive quarter if revenue remains weak and would bring its charges since the credit crisis erupted last summer to more than $45 billion…

...To shore up its finances, Merrill said it would raise $8.5 billion in new capital from common shareholders, including $3.4 billion from the investment arm of the Singapore government, Temasek Holdings, which, with an 8.85 percent stake as of June 30, is already Merrill’s largest shareholder. Those shares and a conversion of preferred securities into common stock will dilute the value of stock held by current shareholders by about 40 percent."

Call me crazy but this is all information that should've been revealed when they reported quarterly earnings if not sooner, it doesn't take a "master of the financial universe" to know that the company has  known of the need to raise capital, dump the CDOs, et al, for weeks now. I'm not so much irritated with the nature of the announcement as I am with the timing of it, as it speaks to a lack of transparency and candor with investors. I wouldn't want to invest in a healthy company that behaves in this fashion, let alone a struggling one like Merrill Lynch.

I'm becoming increasing disgusted with banking executives who are fully aware of the sorry state of their companies yet continue to lie to investors, at best they're clueless fools who were hoping that a miracle would come along to save them and at worse they're liars hoping to minimize the impact on the stock price by withholding key information. I also find it ironic that many financial firms are blaming short-sellers for their stock prices, when they themselves are arguably engaging in market manipulation via the way they mislead investors.

Investors looking to call a bottom in financials and/or rush back into them hoping for a recovery need to take note of the Merrill Lynch situation, and realize that the lack of transparency makes investing in many financials right now tantamount to gambling. What else do you call it when a company announces a move that will dilute the value of investor's shares by 40% 10 days after their quarterly earnings report was issued?

You can read the NY Times coverage in full here.

Sources:

The NY Times: "Write-Down is Planned at Merrill" -- Louise Story, July 29, 2008.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article.