Rinse. Lather. Repeat.

A brief review of recent Merrill CEO statements:

1. We don’t need capital;

2. We could use some capital, but we won’t sell shares, we’ll just sell some assets;

3. We need to sell shares and raise capital right away;

Where is Ken* when you need him?

The financial firms obviously think investors are utter fools. And for a while, they were correct. They suckered people into buying into this mess the whole way down. Bottom calls each and every level — all of which failed. Some analysts even called iBanks a "Generational Buys" — 30% higher.

Only not so much.

Release earnings. Issue guidance. A few weeks later, lower earnings. A few weeks after that, take more write-downs. Raise more capital.  Start it all over again next quarter.

Rinse. Lather. Repeat.

The banks have adopted a Chinese water torture approach — dribbling
out the bad news in small doses over time. Its been working up until now, but I doubt it will keep working much longer. Can they keep fooling people much longer? Merrill issued quarterly
earnings on July 17th, and then dropped this bomb shell on July 28th? They must really think we are idiots, and that the SEC is in their backpockets to even attempt getting away with this crap.

Bill King writes that "Eventually a critical mass of investors and traders will become cognizant of the obvious scheme and
distrust of financial firms’ results, guidance and motives will increase substantially.

John Thain’s credibility is now an issue."

I agree.

Merrill CEO John Thain’s Public Statements


via Bespoke Investment Group


But its not just Thain’s rep that is on the line. Look at how much intervention into the formerly free markets is being done under a guise of "Systemic Protection." That catchall rationalizes a lot of really bad decision making by Politburo Central planners senior government officials.

I don’t think this process will be fully resolved for quite a while, perhaps as long as 10 quarters. And I would expect that despite the best efforts of the American Communist Party Central Planning Committee SEC, the Treasury Department, and the Federal Reserve, these stocks ultimately end up going lower, and perhaps much lower.

$15 is a very realistic target. But how a bout single digits? It certainly is a possibility . . .


A History of Merrill’s Writedowns


Chart courtesy of Jake



* SEC Chairman Cox, a/k/a Ken

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What's been said:

Discussions found on the web:
  1. g commented on Jul 29


  2. Greg commented on Jul 29

    Question: The WSJ said Mer was selling over 30 billion at 22 cents on the dollar. That would be a loss of 23.4 billion dollars. Why is the writedown only 5.7?????

  3. JustinTheSkeptic commented on Jul 29

    Stupid investors need to be punished – only an idiot could have believed these idiots. Why they (corporate excutives) are not mandatorily put on that new “voice lie-detecting device” is beyond me? We have the technology, use it!

    Yes, they are trying to save us all from further grief. Bull shit, THEY ARE TRYING TO MINIMIZE THEIR LOSSES. End of discussion.

  4. Mike in NOLa commented on Jul 29

    Right again, Barry. I suppose Dennis Kneale has invited you to co-host today to express your opinions?

  5. dugafish commented on Jul 29

    Single digits is where they will go-cmplete agreement but for the fact that someone else out there will not be able to resist thinking they can buy the “venerable” Merrill franchise on the cheap-before the stock has a chance to get there…By the way, Mish did a really good piece on the Merrill announcement illuminating the death spiral ratcheting down provisions of the equity offering: http://globaleconomicanalysis.blogspot.com/2008/07/ratchet-provisions-soak-merrill-lynch.html

  6. Formerly known as… commented on Jul 29

    As they say…Death from a thousand cuts. In this case about 40+ billion paper cuts!!

  7. Adam Butler commented on Jul 29

    Politburo Central Planners. Ha! I love it!

    Massive Dilution – super! Time to buy the banks! Sell Gold!

    The arse is out of ‘er; we’ll sleep tomorrow.

  8. blin commented on Jul 29

    Strangely enough, MER is up in pre market trading as some of you mentioned that it would probably close higher today.

    I can only wonder how many Wall Street insiders knew about the bombshell and were able to profit from it. The financials definitely do not offer a level playing field. Anyone who believes the CEO’s of these companies is way too gullible or hasn’t been burnt yet.

    Stay away from them. Short all rallies.

  9. John commented on Jul 29

    I think they’d already written them down to around $11billion at the end of June, according to the WSJ they’re selling them for $6.7 billion. Presumably the 22c on the dollar reflects the original value of $30billion that was on the books.

  10. OpenMind commented on Jul 29


    They had already written down the value of the original 30.6 to 11.1. So writing down to 6.7, produced an additional 4.4, and there are additional writedowns on their protection from monoline insurers which arent worth as much as the contracts were written for, all adding up to 5.7. I’m surprised there’s not more play in the media on the additional $5b of expenses from the resetting features of the investors from the last capital raise. Nor the fact that Merrill is financing 3/4 of the purchase price of this CDO position, with no recourse to Lone Star beyong taking the CDOs back! And all the other banks will now have to mark down at 22 cents on the dollar for similar securities; Deutsche is saying an additional $8b for Citi, for example. Not to mention that Merill is actually only laying off 5.5 cents on the dollar due to the financing. And these were super seniors, so less senior tranches are what, 0 on the dollar right?

    Frankly, I’m quite surprised at the generally positive futures this morning. Clearly the news was already out to some degree given the action in Merrill all day yesterday (new lows on “no news”), and there is some short covering on the news. However, for the near to medium term, is it:
    a. another false bottom generated by a supposed kitchen sink announcement and Meredith Whitney’s positive view?
    b. a real bottom?

    Keeping an open mind, but there really hasnt been enough panic for my money. Put call ratios and other indicators seem somewhat complacent. But we had an awful June and July, and historically that means some decent performance by the end of September (mebane faber’s analysis of performance in months 2 & 3 after major sell off as in June). Sidelines for now, I guess.

  11. Mike in NOLa commented on Jul 29

    This last episode points out the need for shareholder derivative suits. Stockholders for Merrill, et al have lost many tens of billions because of the dishonest financial reports issued by these companies.

    Yet, the ability to sue has been weakened during the past decade because of the propaganda about rich lawyers bringing frivolous actions. I suppose the corporate shills were looking forward to times like this. One of the big functions of the civil tort system is to allow private citizens to seek redress when the government is too lazy or corrupt to do so; it looks like we have both in the current administration.

  12. Mike in NOLa commented on Jul 29


    Meredith had a positive view? Bloomberg TV spun it as her saying Merrill was still expensive.

    Also, your statement about “faber’s analysis” is a little cryptic, at least for this early in the morning for me. Please explain.

  13. mike e. commented on Jul 29

    As the assets continue to deteriorate in value, the banks are being forced to mark down to market. The market value of the assets is a downward moving target. This spiral down is going to continue until the housing market reaches equilibrium. I am sure that the banks have already done their own analysis and they realize that the best way to approach this is to mark down each quarter. Not good.

  14. Mike in NOLa commented on Jul 29

    Here’s the reason for jump in Merrill. They got Meredith to be halfway positive and the shills thought the news was wonderful:

    Merrill Lynch (NYSE:MER): Positive Feedback from Analysts

    With oils and U.S. Steel beating estimates (duh – old news), looks like the full court press will be on today on CNBC. How many times will they mention “bottom” today. Maybe Barry should start a pool.

  15. Billy Bob commented on Jul 29

    Great job with the website. Thank you! One question….is it possible that the government comes into the futures market on mornings like this and pumps up the market, plunge protection team type stuff?

    Thanks again

  16. Chief Tomahawk commented on Jul 29

    Mredith Whitney said “Merril is getting closer”. But she didn’t say to buy OR that it’s anywhere close to time to buy.

  17. Chief Tomahawk commented on Jul 29

    The font used in the chart title “Merril Lynch Write-Downs” is a dead ringer for “The A-Team” TV show title. That works on many levels. The financials are “a dangerous group of mercenaries who’ve gone underground” … Who’s B.A.? Who’s Face??? Who plays the Keystone Cops trying to catch the A-Team, but never succeeding? The Washington Generals live!

  18. OpenMind commented on Jul 29


    Here’s what I read on Bloomberg, with similar slightly positive spins from CNBC:

    Oppenheimer & Co. analyst Meredith Whitney said Merrill’s shares are trading closer to “fair value.”

    “We applaud this purging of assets as an attempt to cut its losses and focus on stabilizing its platform and righting the franchise toward growth,” Whitney wrote in a note to clients today.

    By “faber’s analysis”, I was referring to Mebane Faber who writes the World Beta blog. He did a historical analysis which demonstrated that a particularly bad month led to bad returns in month 1 after the sell off, but months 2 and 3 after produced pretty good returns, with the 6 and 12 month performance pretty tepid. He posted this towards the end of horrible Jan I believe, and it worked pretty well by buying at the beginning of Mar and selling at the end of April (3.8% by holding SPY). He’s tracking how this works for the June sell off.

  19. wiseup commented on Jul 29

    buying financials now is like buying a repossessed house in Flint. Sure is cheap, get in on the ground floor and wait for the last fool to walk in. We are suddenly supposed to feel that the incompetents who got us here are now our salvation? What the hell is the new model they are selling?

  20. Mike in NOLa commented on Jul 29

    Re: The A Team

    Difference from the A-Team is that no one ever got seriously hurt on the TV show :)

  21. HCF commented on Jul 29

    Barry –

    I love how this page is labeled as “how-fucked-are.html”

    That really put a smile on my face =)


  22. SINGER commented on Jul 29

    interesting trading early on in MER!!!

  23. Nihilism commented on Jul 29

    …Imagine if some of these PE & Hedge Funds guys, Wall Street CEOs and some similar maniacs were born in some third world countries like Pakistan, N Korea, Iraq, Iran.

    Thanks god they are dropping bombs on people’s balance-sheet here and these crazy maniacs don’t have access to nuclear arsenal.



  24. Marcus Aurelius commented on Jul 29

    We are now America in name only. Our Constitutional Republic no longer exists.

  25. Marcus Aurelius commented on Jul 29

    We are now America in name only. Our Constitutional Republic no longer exists.

  26. Marcus Aurelius commented on Jul 29

    We are now America in name only. Our Constitutional Republic no longer exists.

  27. Marcus Aurelius commented on Jul 29

    We are now America in name only. Our Constitutional Republic no longer exists.

  28. Mark commented on Jul 29

    With leaders like this, who needs enemies.

  29. gunthestops commented on Jul 29

    Geeeezzzz you guys are gloomy—Remember stocks can’t go any lower then zero!!!

    where is Chuck Prince when you need him?????

  30. Donkei commented on Jul 29

    “Stocks can’t go any lower than zero”

    They can if you’re a shareholder that also pays taxes to fund the PPT.

    The formula:

    PPT price – real market price = taxpayer subsidized portion of the share price.

    If the taxpayer subsidy plus administrative expenses (of say, the twits at the SEC) exceed what would otherwise have been the real market price, then stock prices have indeed fallen below zero.

  31. Mel commented on Jul 29

    MER went from bullish on America to bullshit on America–almost the same letters.

  32. wally commented on Jul 29

    this country is really being looted, isn’t it?
    What other conclusion can you draw? From Iraqi contracts to FEMA corruption to the Homeland Security bureacracy to the the investment bank swindles (let’s be honest, those people cannot REALLY be as stupid as they pretend. Nobody could) to mortgage misrepresentation and corruption… it is just being looted.

  33. Greg0658 commented on Jul 29

    onearmbandit connected with supercomputerinfrastructure knowsall & thehouse alwayswins

    whosonfirst whatsonsecond playitagainsam

  34. Mark S. commented on Jul 29

    As another commenter noted (and as the WSJ article you linked to yesterday said in the fine print), while the sale to Lone Star was a nominal 22 cents on the dollar, 75% of the cash for the purchase was lent to Loan Star.

    So, they sold the CDOs for less than 6 cents on the dollar, and some air-kisses. Because, what collateral do you think Lone Star pledged for the loan? And given Merrill’s capital position, what does getting the capital later do for them?

    Oh. A “functioning loan” lets them lie on their balance sheets to the SEC. Because it will be quite some time before the loan stops being a performing asset, and becomes the joke with a sour punch line.

    Perhaps that’s what all the banks should do – have a Mad Hatter’s tea party, and shift their debt to the left for a clean cup – and lend the money for the sale. The steaming pile of dung that are CDOs will still stink, but they can postpone the pain on their balance sheets for a year or more.

  35. Patrick commented on Jul 29

    Wait, now I’m confused. They sold the bonds at 22 cents on the dollar, had to pay out singapore 67% or wherever due to their previous money raising agreement, AND lent 75% of the covered call to lone star? Senior tranche of 2005? 2 weeks after quarterly report?

    It’s a bit early in the morning for me and I will have to read up later but… um…


    And can someone explain to me how 67% for half a year on the raised money, plus loaning 75% of the covered call (which as far as I can tell doesn’t require ML to actually ship out the money…but I could be wrong) minus the $6 billion writedown, fib out the $30 billion that is worthless, mark the rest to market… and… that get’s spun as a $8.5 billion capital raise? They just basically admitted they’re insolvent and… a capital raise. Amazing.

  36. PhatMary commented on Jul 29

    effectively borrowing money at about 65% interest for six months…yowser!

  37. ECONOMISTA NON GRATA commented on Jul 29

    “Merrill CEO John Thain’s Public Statements”

    Who’s spreading the false rumors now….?

    Best regards,


  38. PhatMary commented on Jul 29

    Who or what is holding this market UP????If this were the early inties or late eighties this market would have crashed a long time ago. I dont get it…

  39. eh commented on Jul 29

    They must really think we are idiots, and that the SEC is in their backpockets to even attempt getting away with this crap.

    You finally seem to be getting it Barry. Congratulations.

  40. brion commented on Jul 29

    “this country is really being looted, isn’t it?
    What other conclusion can you draw? From Iraqi contracts to FEMA corruption to the Homeland Security bureacracy to the the investment bank swindles to mortgage misrepresentation and corruption… it is just being looted.”
    Wally….You forgot the prescription drug (Co.) benefit, the billion dollar tax breaks for big oil, interest rates lower than inflation impelling people into Stocks just in time for a “generational slaughter”, the Debt bomb, the trashing of the dollar with resulting inflation, the lobbyist foxes placed in charge of the regulatory hen houses, the Corporate/Congressional Fascist nexus….

    In my life i’ve rarely had a good impression of business practices or ethics and this latest round of corporate atrocities (the worst i’ve ever seen) is just the latest example of why that is.

    This story is OLD.
    The vampires come out, they rampage, the left spend recklessly to help “the victims” and re-regulate the corporate ticks back into their coffins, the populace goes back to sleep, Republicans are voted back into office on some new free-market slogan and the cycle repeats.
    Every major religion warns against excessive greed and love of wealth or making it into one’s god…..Why?
    Is it because the devil’s favorite doors into our world originate in the office suites of america?

  41. Eric commented on Jul 29

    It was one year ago this month that Jim Cramer wrote it was silly for investors to doubt the assurances of then Merrill CEO Stanley O’Neal.

  42. John commented on Jul 29

    I realize the actions of our government appear all communistic on the surface.
    But communists socialize the costs and the profits.
    I would call what is happening now the actions of the Butt Boy Crony Capitalist Central Planning Committee whose main purpose is to socialize the costs and privatize as many profits as they can steal.
    It appears to me that their planning is right on schedule.
    But what would I know, I’m just a civilian in all this.

  43. Andy Tabbo commented on Jul 29

    So, Vince Farrell was the guest contributer today on CNBC.

    Let me start by saying, he seems like a very nice gentleman. Definitely seems like a genuinely good person.

    But, in his final thoughts today he says:

    “We all knew this was going to spread to prime, and automobiles and credit cards…and now we can see it…we’re not waiting for it any more…so that’s a good thing.”


    This was the same dude that was saying we bottomed in January and ‘successfully’ tested the bottom in March, even though March violated the Jan lows on the real indices. Then, when we were collapsing in June he was the one telling us…”it’s ok…50% pull backs are normal”…before we set a new low yet again.

    Who is this guy? Why is he on TV? Why is he managing funds?

    – AT

  44. CNBC Sucks commented on Jul 29

    I am not sure what is a bigger marvel: Dennis Kneale leading my poll on the “biggest tool on CNBC” when you have other formidable major league tools like Larry Kudlow and Jim Cramer, or anybody getting any votes in edgewise when Dennis Kneale – like a Japanese samurai warrior – has honed and perfected the art of professional idiocy. I try my best at not watching CNBC, so how many calls for the bottom on financials have there been today? My goal forevermore is to rely entirely on your second-hand information to learn about whatever happens at CNBC.

  45. Eric commented on Jul 29

    Andy, I couldn’t agree more about Farrell. Seems perfectly nice enough, but a complete hack. He’s shown no insight at all — none, zero, nothing. He looks at the headline numbers for the day and then comes up with the same kind of “conclusions” that you might find on the cover a USA Today or the MSN homepage. Very surface oriented. And yes, very unaccountable too. Let’s face it, there’s a reason TSCM is at $6 and still in search of a reliable business model.

  46. Chuck Ponzi commented on Jul 29

    Isn’t the saying… Lather, Rinse, Repeat?

    Otherwise, you’ll walk out of the shower with a head full of suds.

    Hmmm. Sudsy bubbles.

    Chuck Ponzi

  47. AGG commented on Jul 29

    Merril appears like to have dissonance with their cognitive ababilities.
    Actually, they trying to distance themselves from their con.

  48. Matthew Camp commented on Jul 29

    I haven’t seen the numbers for this most recent quarter but how much of Marril’s “earnings” came from them “marking to market” their liabilities, i.e. their debt. There is an excellent article on Bloomberg that shows that they have booked $4B in “revenue” from this already, I am sure they are still doing it.

    The link:

    Bloomberg Story New Bond Math


  49. me commented on Jul 29

    My question is who is going to buy this CRAP?

    “Merrill Lynch prices $8.55 bln offering at $22.50 a share (MER)
    SAN FRANCISCO (MarketWatch) — Merrill Lynch & Co. (MER) said Tuesday it priced its $8.55 billion secondary stock offering at $22.50 a share. The offering entails 380 million shares with an up to 57 million shares for over-allotments. Shares of Merrill rose 2.9% to $25.04 in recent trading.”

  50. JimmyY commented on Jul 29

    Sounds like MER just underwrote another subprime loan to get rid of one! Creative financing at its best. Is it me…or does anyone else smell desperation in the air?

  51. me commented on Jul 29

    I’m too cynical. I think the MER dilution was a calculated and planned unwind as part of the original deal.

  52. Bad Home Cook commented on Jul 29

    The New Yorker needs to give you a column now. You’re doing the investigative journalism no reporter has the chops (or quant skills) to do. Hugely impressive. And grateful thanks.

  53. Vermont Trader commented on Jul 29

    I know Win well, he runs Sugarbush ski area up here and has done a great job revitalizing the area..

    He is a straight shooter and I respect his opinion…

    from Bloomberg..

    “Winthrop Smith Jr., the former head of Merrill Lynch & Co.’s international brokerage unit, said he’s buying the firm’s shares again after Chief Executive Officer John Thain announced plans to shed risky assets and raise capital.

    Smith, who left the firm in 2001, sold all his shares before Thain took charge of the third-biggest U.S. securities firm last year, he said in a Bloomberg Television interview today. Thain raised $8.55 billion of equity today and sold $30.6 billion of bonds at a fifth of their face value to preserve credit ratings threatened by mortgage losses.

    “John Thain inherited a sick patient,” said Smith, 58. “I think this is medicine which is a little bit bitter, but I think it’s a good move, and I think it does remove a lot of risk, if not most of the risk from the balance sheet.”

    Smith worked at Merrill for almost three decades before exiting when he lost out to Stanley O’Neal in the race to become Merrill’s president. Under O’Neal, Merrill became the leading underwriter of collateralized debt obligations, bonds created by packaging other debt securities. O’Neal was ousted last year after a decline in the U.S. housing industry caused a collapse in the market for CDOs and mortgage-backed securities.

    Smith’s father, who bore the same name, was CEO of Merrill from 1959, when Merrill converted into a public corporation from a partnership, until his death in 1961.

    Merrill rose 36 cents, or 1.5 percent, to $24.69 at 1:18 p.m. in New York Stock Exchange composite trading. Before today, the stock fell 56 percent this year.

    `Good Value’

    “I’ve started to buy a little bit here, and I think this is good value going forward,” Smith said.

    Banks and securities firms have raised more than $350 billion after the global credit contraction led to credit losses and writedowns of more than $470 billion. The crisis cost Bear Stearns Cos., the fifth-biggest U.S. securities firm, its independence when it was forced to sell itself to JPMorgan Chase & Co. to avert bankruptcy.

    “Usually there’s an event both at the top of the market and the bottom of the market that’s climactic,” Smith said. Merrill’s asset sales and capital-raising “appears to be one sign that maybe the market is beginning to bottom out and maybe the worst of the troubles are over,” Smith said”

  54. winslow commented on Jul 29

    When will our screwed-up government start charging these CEO’s and Boards and begin confiscating their assets and sending them to hard prison time…………..boy, will you ever see how fast these companies are run better for the long-term!

  55. vvi11 commented on Jul 29

    Great Post.

  56. reddog commented on Jul 29

    never underestimate Mother Merrill…best sales force in the history of the USA

  57. FormerBanker commented on Jul 29

    Where is the clueless SEC enforcement guys? This loss needs to go back to Q2 via restatement. A 40% bigger loss, less than a month after quarter end and 10 days after earnings release is ridiculous. They re gaming the #’s to take losses as they find capital. Thain is either clueless about MER’s baslance sheet or a bald faced liar, neither of which is good for shareholders. Stay away from MER except on the short side.

  58. MurrayR commented on Jul 30

    Chart looks like a stick of Fruit Stripe Gum, whose flavor, like Merrill’s BS, runs thin very quickly and starts to taste like shit.

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