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Merrill Lynch reported today that it is taking an $8 billion write down for bad mortgage debt held as collateralized debt obligations (CDOs). The $8 billion totals the losses reported by Citi, UBS and WaMu combined. Merrill Lynch stock was hammered as expected.
The real story here? Merrill pre-announced write down charges in the $4.5 billion range 3 weeks ago in advance of its earnings call. Today that number is nearly double their initial estimates based on a self-proclaimed “more conservative approach” to write downs over the last 3 weeks of analysis. Of course, no one now believes what Merrill is saying. The size of the miss is insane and throws in to question how upfront other banks have been and how exactly are these banks valuing their CDO and other structured debt to get to these write downs? Merrill for its part didn’t yield much in the way it calculated the write down.
From Market Watch:
“It turned out our assessment of the potential risk and mitigation strategies were inadequate,” [Merill CEO Stan] O’Neal said. “I am accountable for the mistakes as I am accountable for the performance of the firm overall and my job, our job, the leadership team’s job is to address where we went wrong, what changes were necessary to make sure we respond to changes early, correctly and in every asset class at every stage of market’s evolution,” O’Neal said.
O’Neal continued that while they were well protected in the poorer debt classes their exposure to losses in highly-rated debt was greater than most; and that their hedging strategies were inadequate and poorly timed to protect the company against loss in those assets.
Look for heads to roll at Merrill - and look for questions to be raised about how, exactly, these banks are calculating their own write downs.
