Merrill Lynch will go down in a blaze of gory write downs, according to Fox-Pitt Kelton analyst David Trone. He expects the troubled brokerage, which is set to be acquired by Bank of America, to write down $8.5 billion for the third quarter quarter.
Keep in mind that any new write downs come on top of last quarter’s mammoth $5.7 billion write down. That write down was supposed to be a “watershed moment” and “the final round” of write downs. CNBC described it as a “kitchen sink moment.”
It was, well, achieved in part by Merrill selling its collateralized debt obligations one fifth of their value. Following that quarter and assurances that the worst of times were past, Merrill managed to raise another $8 billion. Are investors supposed to be underwater after a watershed? Does a “kitchen sink” moment mean you are still going down the drain? If so, we guess that totally worked out.
Reuters describes Trone’s write down breakdown.
“The $8.5 billion writedowns will include $4.4 billion loss on sale of asset-backed securities collateralized debt obligations and $1.3 billion loss on termination of hedges with monolines, Trone said.
He also expects writedowns of $1.3 billion for “Alt-A” mortgages, $600 million for prime mortgages and $450 million for sub-prime mortgages.
Expenses for the quarter may include $2.5 billion in reset payment to Temasek, $2.4 billion in dividend payments resulting from conversion of $4.9 billion in preferred to common shares, and $125 million in fines related to auction rate securities, he said.”
If that sounds awful, keep in mind that in the past Trone has underestimated Merrill’s write downs. Reality might be even worse than this prediction. Merrill ranks at number 2 in the Biggest Losers League Table of Writedowns, with $51.8 billion reported already.
Trone expects a loss of $5.07 a share in the third quarter, which a downward revision from his prior view of a loss of $2.86 a share. The average analyst estimate is a loss of $4.92. He rates Merrill “in line,” but which line is he talking about? We’re guessing it is the line to the men’s room. Trone’s still estimating a fourth-quarter profit for Merrill because hope lives eternal. He think Merrill will make 23 cents a share, which is a cut from his previous estimate of 35 cents a share. That cut reflect a loss of $325 million from Merrill’s agreement to buy back $3.25 billion in auction rate securities.
Merrill is scheduled to report earnings on October 16. When the write downs come, how much do you want to be we’ll hear that this, finally, is the end?