A week ago we warned that even the most dire predictions of Merrill’s write-downs were very likely underestimating the damage that firm had suffered. Today Merrill revealed at least $9.5 billion in write-downs, handily surpassing Fox-Pitt Kelton analyst David Trone’s estimate of $8.5 billion.
Merrill was particularly hit hard by the “severe market dislocations” in September when Freddie Mac and Fannie Mae were nationalised and Lehman Brothers declared bankruptcy. Nine days ago reported that JP Morgan Chase asked Merrill to pony up around $10 billion in additional collateral to back its trading positions in mid-September. That number suspiciously close to Merrill’s actual writedowns. All this seems to indicate that JP Morgan was making some very prudent moves while Merrill was cratering.
It’s also another lesson in the value of distrust in this market. We keep hearing about the problem of panic and irrational fear but fear can be your best friend in this market. Just because you are panicking, doesn’t mean the bank isn’t failing. When Merrill announced $5.7 billion in write-downs for the second quarter, and a sale of mortgage related assets at 22 cents on the dollar, it was supposed to “set the standard for a final round of writedowns in the financial sector.”
Fortunately for Merrill, Citi reported today as well. That keeps Merrill out of the top spot on the Biggest Losers League Table. It’s still ranked as Number 2 in the Biggest Losers League Table of Writedowns, with $61.3 billion reported to date.
Earlier: Merrill Implodes.
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