* The economy: Merrill seeks more funds to avoid crisis *


Richard Moore

From: "don.stacey" <•••@••.•••>
To: <"Undisclosed-Recipient:;"@d.mx.aliencamel.com>
Subject: ###   FINANCIAL CRISIS: Merrill seeks more funds to avoid crisis   ###

Date: Sat, 29 Dec 2007 23:52:30 -0500

Most people do not understand just how serious the current financial crisis in 
our country really is. Believe me, it is monumental and threatens the very 
financial system in this country. Of course, it may be resolved with less pain 
than most knowledgeable people fear, but it also may not be so neatly resolved.

The problem centers on mortgages. You have heard the term "sub prime" many 
times, but that doesn't correctly characterize the full picture. There are many 
mortgages that are not sub prime that are in default or are threatening to 
default. Large numbers of mortgages were used to back securities sold all across
the globe. Those securities were in turn used to back other securities and often
there were several layers of leverage on mortgage backed securities. Because the
terms of many of these mortgages were adjustable and issued with "teaser" rates 
initially, many home owners are faced with a newly adjusted monthly payment that
is beyond their means. Hence the soaring foreclosure rates that you are reading 
about. But it isn't limited to residential mortgages. There were other 
obligations besides mortgages also used to back securities that are defaulting 
as well. Corporate loan defaults, Corporate real estate mortgage defaults, car 
loan defaults, and credit card delinquency rates are rising significantly. In 
addition, Credit Default Swaps ( in essence insurance policies on outstanding 
debt issues ) which amount to about 45 trillion dollars are looming as well.

The sum of all this has caused serious problems for banks and brokerage firms. 
They hold substantial amounts of these securities. They paid full price for them
and now they are worth much less. How much less is not clear but there have been
situations that suggest that they may be worth as little as 20% - 30% of the 
price paid by these firms. So they face huge writeoffs. Some of these writeoffs 
have been announced but more will come. The essence of the crisis is how much 
more will come. Since there are estimates of in excess of a trillion dollars as 
the face value of such securities, there will be very large writeoffs coming 

The balance sheets of both banks and brokerage firms usually have small amounts 
of equity anchoring huge amounts of assets. As the assets are written down, the 
equity decreases. That is why we are seeing multi-billion dollar investments by 
foreign sources in our banks and brokerage firms. The invested capital is to 
replace the amounts lost as assets are written down.

There is a very real prospect that a major bank or brokerage firm may fail in 
the coming months. Should that happen, it would be further pressure on the 
economy and push it further towards recession, and perhaps, depression.

We have some truly tough times ahead.

Don Stacey
Original source URL:

Merrill seeks more funds to avoid crisis

$4.4bn from Singapore's Temasek not enough

James Doran in New York and 
<http://www.guardian.co.uk/profile/richardwachman>Richard Wachman

<http://observer.guardian.co.uk/>The Observer,
Sunday December 30 2007

John Thain, the new chief executive of Merrill Lynch, is this weekend in talks 
with Chinese and Middle Eastern sovereign wealth funds that could lead to the 
sale of another big stake in the US bank in a desperate bid to raise capital, 
according to sources in London and New York.

The discussions come just days after Thain was forced on Christmas Eve to sell 
$4.4bn (£2.2bn) of stock to Singapore investment firm Temasek as part of a wider
plan to raise some $7.5bn.

Merrill Lynch has already taken an $8bn hit related to sub-prime investments, 
but Wall Street fears that the bank's problems could go far deeper. 'Thain is 
desperately seeking an additional infusion of foreign capital to bolster 
Merrill's balance sheet,' said one source. 'It could be done by selling shares 
or other assets to raise cash.'

A US observer said: 'The multi-billion cash injection from Temasek was not 
enough and Thain is taking calls from a host of other potential saviours, which 
are understood to include sovereign fund investors from the Gulf and China.'

Analysts believe that Thain needs funds urgently in a bid to thwart future 
liquidity problems. The bank has already announced plans to lay off 1,600 staff.
'Thain is raising capital in anticipation of a large fourth quarter write-down,'
said Sanford Bernstein analyst Brad Hintz.

Sources close to Merrill Lynch say that Thain has cancelled New Year leave among
his top lieutenants and that his team is working around the clock on various 
'scenarios' that could be employed to save the bank if problems related to the 
credit crunch continue to worsen.

'It is all hands to the pumps here,' the source said, adding that the 
possibility of exploring a merger with another banking group had not been ruled 
out but was considered 'an extreme scenario'. 'Everything is on the table,' he 

Fears are mounting that Merrill Lynch will be forced to write down between $10bn
and $15bn worth of assets related to CDOs - so called collateralised debt 
obligations - when it reports financial results next month. Stan O'Neal, the 
bank's former chief executive, was forced to resign when Merrill revealed 
write-downs in November.

Under strict new accounting rules enforced in 2004 by the Securities and 
Exchange Commission, Wall Street banks are required to have certain levels of 
liquidity to match their obligations, just like ordinary high street banks. This
has prompted the likes of Merrill Lynch, Citigroup and UBS to seek large cash 
injections from foreign investors amid the worsening credit crunch.

Aside from the $4.4bn share sale, Merrill Lynch agreed to sell its middle-market
lending business, Merrill Lynch Capital, to GE Capital, freeing up $1.3bn in 
equity. The troubled banking group will also sell an additional $1.2bn worth of 
stock to Davis Selected Advisers.

Analysts have so far predicted that the bank will be forced to write down 
between $10bn and $11.5bn, but the value of the assets affected by the credit 
crunch is falling in value by the day as the market continues to seek a way out 
of one of the worst liquidity crises in history.

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