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Can Merrill Make It Out Alive?


CEO John Thain not the savior many hoped for.


The market fell through a trapdoor right out of the gate yesterday and as the session went on the nagging question was if the hole led to a bottomless pit. There was no relief for stocks: At no moment during the session was there a glimmer of hope.

Looking for a positive spin on this action, the only thing I can say is the market will get to key support points sooner rather than later. Of course, they have to hold. For the Dow the next key support point is 11,000, then 10,800. A move below there could be disastrous.

The crazy thing at this stage of the game is that news isn't new but a reminder of the tough road ahead. Or as they used to say down South when I was a child: "It's a tough row to hoe." I have to say I tried using a hand plow tied to a mule when I was a teenager and it was like trying to move a brick wall.

Speaking of "brick walls," what kind of effort is it going to take to regain investor confidence? Many investors at this stage of the game probably feel like they've been burned by their own mishaps and by the amount of snake oil salesmen.

Oh, and the snake oil guys? I think the general consensus now is that it's the folks on Wall Street. Over the weekend presidential candidate, Senator John McCain called the folks on Wall Street "villains" because there are fewer, easier targets. That bull's eye on Wall Street's back got a lot bigger overnight.

On that topic, one of the would-be good guys on Wall Street has now taken a hit to his reputation and maybe dropped the last bomb that could sink the Street. Merrill Lynch (MER) CEO John Thain was initially greeted as a savior. He was supposed to have all the tools and magic (and maybe even some snake oil) to save the world's largest brokerage firm.

The job is on-going but going to be more difficult in spite of or because of news released last night: Merrill Lynch will attempt to raise $8.5 billion in new capital.

In order to pull this off the company went back to Temasek (Singapore), which will buy $3.4 billion of the new offering, expected to be as much as 200 million common share. Management is going to purchase 750,000 shares, too (I feel better already). Moreover, the company also sold mortgage backed assets with a notional value of $30.6 billion for $6.7 billion and will finance 75% of the purchase (Heck, I should have picked up some of that paper).

Thain has been pretty adamant that the company didn't need to raise money. He battled analysts during the last conference call and dismissed persistent rumors the company needed to raise money. This latest round of money rising is going to be very expensive, resulting in a write down of $5.7 billion and other adjustments made to compensate Temasek for earlier investments at higher prices.

Merrill Lynch shares were down after the news but struggled to be up slightly, and in some bizarre fashion last night's news will be viewed by many as a positive. I have to say, the last time anyone with this kind of flimsy financial creditability and track record was able to find lenders was the last wave of sub-prime housing loans.

I do believe Merrill is going to make it out of this malaise but the deterioration of trust between banks and banks, banks and analysts and banks and investors will make full recoveries years later than they could have if the industry had been straight out of the gate.

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No positions in stocks mentioned.
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