Let’s start with what’s (mostly) known at this point: Merrill Lynch & Co. (MER) is likely to sell assets. After all, CEO John Thain has said the Wall Street firm will not need to raise additional equity, and it’s generally assumed that Merrill needs additional capital to weather the ongoing credit and mortgage storm. The most likely target for a sale is Merrill’s 20 percent stake in Bloomberg LP, which published reports have speculated for the past few weeks will be sold back to a blind trust of New York mayor Michael Bloomberg. On Tuesday evening, the New York Post reported that the mayor’s trust has set the purchase price for Merrill’s stake between $4.5 billion and $5 billion. Whether Merrill ultimately sells its entire stake or just a portion of it is yet unknown, as the company is also rumored to be considering a sale of a portion of its 49 percent stake in BlackRock Inc. (BLK), the biggest publicly traded U.S. asset manager. Not surprisingly, nobody at Merrill (or Bloomberg) is talking. But sources have suggested to HW that one or both sales must go through, as Thain’s assertions that Merrill doesn’t “need” to raise further equity are merely cover for a harsher reality: that the Wall Street giant has little other option than to sell assets, because it can’t realistically raise capital via equity. Such chatter, of course, has been discussed ad nauseum in the financial press thus far. Merrill has already raised more than $10 billion to offset the mortgage losses it’s already had to absorb; a fresh sale of common stock would be prohibitive, given a required large payout to investors that bought $12 bilion in the company’s common and preferred shares earlier this year. Preferred share issuance would also be problematic; the Wall Street Journal reported last week that Merrill already has so many preferred shares outstanding, that any new issuance of preferred stock would be unlikely to pass muster with major credit rating agencies. Which essentially leaves us looking at Bloomberg and BlackRock. The Financial Times’ Lex implied Tuesday that a BlackRock sale might be more palatable for Merrill, given the substantial tax bill that would come from any sale of Bloomberg interests. Merrill’s Bloomberg investment is carried on the firm’s balance sheet at $28 million — meaning that any sale of the asset, in whole or in part, will carry a pretty substantial capital gain hit to go along with it. Merrill may have little choice, however, as it faces writedowns in the second quarter that analysts expect could be as large as $6 billion. The firm has more than $26 billion in remaining exposure to CDOs alone, and efforts to hedge that exposure by buying guarantees from key bond insurers have likely backfired with recent downgrades to both MBIA Inc. (MBI) and Ambac Financial Group, Inc. (ABK). Disclosure: The author held no positions in publicly-traded firms mentioned herein when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

About the Author

Most Popular Articles

Housing market flashing recession signal

The housing market is signaling there will be an economic recession by the 2020 election, according to Benn Steil, director of international economics at the Council on Foreign Relations.

Oct 11, 2019 By

Latest Articles

Foreclosure activity drops to lowest level since 2005

Foreclosure activity sank in the third quarter of 2019, dropping to the lowest level in nearly 15 years, according to the latest report from ATTOM Data Solutions. Foreclosure activity in the third quarter fell 19% from a year ago to the lowest level since the second quarter of 2005, a 13-year low.

Oct 16, 2019 By