Sunday, October 28, 2007
O'Neal Saves The Day For Merrill Lynch
Sub-Prime Mortgage Write-Downs
Its interesting that Merrill Lynch is the one targeted in some media today for publicly clearing its books of the sub-prime mortgage fiasco by announcing the write-down of approximately 8 billion USD in Q307 for bad CDO's, Sub-Prime Mortgages, and complex debt instruments. The write-down was announced to the markets by Merrill's Chief Executive Stanley O'Neal. The market reaction has been positive thus far.
Investors may have responded on Friday to this by buying Merrill Lynch stock because it may be close to the end of the bad news for them. Merrill's stock (NYSE:MER) was up 5.19 (+8.52%) and it continued climbing in after hours trading. The Merrill Lynch Board will have to thank Stan O'Neal for his excellent ability to read the markets and announce what they were looking for - the truth.
The global Sub-Prime crisis still continues with some banks Citigroup, JPMorganChase and Bank Of America, trying to float a 75 billion USD fund of difficult to market mortgage securites. As an analogy, "its like trying to sell full fare tickets in 2007 to your neighbour for a trip from London to New York on the Concorde.". This fund is being termed SIV for Structured Investment Vehicle. Warren Buffett, considered a very capable investor in most circles, wants the trio of banks to float a percentage of the SIV fund on the open market, so as to determine its real price. Thats not just Buffett's financial acumen, it is a corporate finance requirement.
The real boardroom activity needs to be at the Trio's headquarters. This fiasco is stopping the American economy from recovering and from the stock market being reinvigorated because these institutions fail to write down their debt and instead leave uncertainty in the market. Get all the bad news out fast - any PR person knows that. The delay in financial reporting by these banks will only hurt their stock prices further in the long run. The U.S. economy is strong enough to support the short-term weakness of these banks and there are so many investment opportunities in renewable energy and environment stocks in the U.S. The markets appear to day by day be looking for the truth not a cover up. The trio needs to write down their debt and join ways of Merrill Lynch. Only then will the banks start to trust each other and trade together openly.
If investors thought Merrill was so weak from its write-down they would never have bid the stock up 8.52 % yesterday. Nobody is that stupid.