Merrill Following Bear Down?

Market Fears That Merrill’s Lawsuit Signals More Write-Downs
March 19, 2008, 6:35 pm


Does Merrill Lynch’s lawsuit against a unit of the bond insurer Security Capital Assurance presage another series of write-downs at the securities firm?

According to two traders quoted by Reuters, speculation that another accounting charge awaits Merrill lay under its lawsuit against XL Capital Assurance, trying to enforce the guarantee of $3.1 billion in debt issued by complex mortgage securities known as collateralized debt obligations.

“We filed suit to make clear that XL Capital Assurance Inc. is required to meet its contractual obligations,” a Merrill spokesman told Bloomberg News in a statement.

Shares in Merrill fell 11 percent to $41.45.

Financial stocks got a much-needed shot in the arm over the past two days by strong earnings reports from Morgan Stanley, Goldman Sachs and Lehman Brothers. With the specter of Bear Stearns‘ demise still hanging over the financial sector, the markets are still considered a powder keg.

“Something stinks over there and the way the market has been lately is that people shoot first and ask questions later,” one trader told Reuters.

The stakes are high for Merrill, which sued the bond insurer in Manhattan federal district court. Along with many of its peers on Wall Street, the firm posted billions of dollars in losses because of its bet on mortgage trading. As shaky home loans collapsed into default, the value of securities built upon them plummeted as well, saddling Merrill and others with assets they could not and cannot sell.

Reuters points out that Merrill identified $3.45 billion in exposure to bond insurers for asset-backed securities.

Go to Article from Reuters »
Go to Article from Bloomberg News »

1 comments so far...
1.March 19th,
2008
7:37 pm I’ll post what I added to another thread on the same topic:

The “two-banger” (the lawsuit against the bond insurer and the rumors of upcoming large writedowns) facing Merrill this afternoon is not good news for them at all.

I don’t like to make predictions, but it seems - notwithstanding any unforeseen events - that Merrill “The Bull” is going wind up having a very bad week, which will probably extend to the market at large. There are several reasons why.

The Bond insurers, Security Capital Assurance (SCA), basically told Merrill to pound sand on 3.1 billion in contracts. SCA’s stock rose nearly 9% on the news. What that implies is that investors have confidence in SCA’s “screw you” position. What it also implies is that if investors and stakeholders in Merrill begin to believe that the company’s massive exposure in cruddy bonds isn’t insured, they’ll begin to pull away, which is happening already. What it further implies, is that other bond insurers are likely to follow SCA’s lead to try to pull away, further exacerbating a bad situation and adding fuel to the fire.

This news broke rather late, but Merrill, and the entire market, began to head down sharply immediately afterward. In fact, the market was trending at a faster and faster rate as the closing bell approached, the fastest drop occuring right up at closing.

This indicates that investors weren’t done selling. Because the news came late, it would seem that many will be selling Merrill stock first thing in the morning, especially those who pick up on this after closing.

From a Reuters article:

Quote:
Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey, said there were rumors of a $12 billion write-down and a $6 billion private placement.

“This is all speculation, but the bottom line is that there are write-down rumors at Merrill,” said Saluzzi. “Either way, something stinks over there and the way the market has been lately is that people shoot first and ask questions later.”

If the writedown speculation is true, Merrill’s will then have approached nearly 40 billion total in writedowns.

— Posted by John Grasmeier