To paraphrase President Franklin Roosevelt, Monday 09/15/08 is a day that will live in infamy. The two last serious potential acquirers of Lehman Brothers (LEH), Bank of America (BAC) and Barclays Bank have pulled out, with Bank of America (BAC) pulling a suprising move and offering $29 per share for Merill Lynch (MER) instead. As a result, with no acquirers to rescue the company, Lehman (LEH) is filing for bankruptcy.

The futures are indicating that we will see a drastically lower open and the only potential saving grace will be the Bank of America (BAC) offer for Lehman (LEH), which might temper the loss in stocks of financial companies.

With the markets getting closure of sorts on Lehman Brothers, Wall Street will now start looking at whom the next financial company to fall will be and the most likely candidate is AIG (AIG).

AIG will be announcing a restructuring plan later on Monday although it is unlikely that the plan will completely assuage investors concerns. The root cause of the problems we are having in the markets and in invidividual companies still exists and as such the smart money will be betting on the fall of at least one more major financial company.

We will probably see further declines in stocks over the next few days, so while traders who are not already properly positioned might miss out on the bulk of the losses for this week, there are still gains to be had by going short.

Traders should consider puts on the S&P Ultra S&P 500 Proshares (SSO) and Powershares QQQ (QQQQ).

If AIG opens above $7, traders should consider buying puts on AIG as well, or shorting the stock itself.

Tags: Lehman  Merrill Lynch  QQQQ  Lehman Bankruptcy

Bank of America (BAC) has reportedly acquired Merrill Lynch (MER), in a deal that’s worth $44 billion, or $29 for each share of Merrill Lynch (MER). The boards of both companies have reportedly approved the deal.

While the $29 per share offer represents a rich 70% premium to Merrill Lynch’s (MER) closing price of $17.05 on Friday 09/12/08, it is still an almost $8 discount to the recent high of $36.97 level that Merrill Lynch’s (MER) shares touched on July 23 of this year and a 63% discount to the stock’s 52 week high.

The purchase of Merrill Lynch (MER) by Bank of America (BAC) will come as a surprise, as the bank was as late as Sunday evening, looking through Lehman Brothers’ (LEH) book and was considered one of the most likely buyers of Lehman (LEH).

A tie up of both companies will create a financial powerhouse that will rival Citigroup, which is currently the largest bank in the U.S., based on asset.

Tags: Merrill Lynch  Bank of America  Lehman

Back on August 7th, perhaps in a bid to jump ahead of government officials and do things in a manner that would cost it the least, Merrill Lynch (MER) announced that starting in January 2009 and ending a year later, it would purchase at par, ARS that were purchased from the firm by its retail clients.

New York Attorney General Andrew Cuomo promptly jumped on the firm, claiming that that was not good enough and this week, announced that if Merrill Lynch (MER) did not reach an agreement with his office by Thursday, he would sue the firm on Friday. On Thursday evening August 21st, Merrill Lynch (MER) announced that it had reached such a settlement.

It will now move the starting date of its repurchase of ARS from its retail clients up to October 1, 2008 and a start date of January 2, 2008 from other eligible parties. It will also compensate other clients who between February 13, 2008 and August 21 sold their ARS at a loss, participate in arbitrary hearings for clients who suffered a substantial loss in the ARS holdings, and pay a $125 million fine.

Also announcing settlements on Thursday August 21st, were:

Goldman Sachs (GS), which announced a settlement agreement with the New York Attorney General’s office and the Illinois Securities Department. Under the agreement, the firm will pay a $22.5 million fine and start repurchasing immediately, all ARS that was purchased by Goldman Sach’s (GS) Private Wealth Management clients through February 11, 2008.

Deutsche Bank (DB) will repurchase ARS from its clients and pay a $15 million fine.

 auction rate securities goldman sachs merrill lynch

Stocks are falling today 08/19/08, after Producer Price Index numbers released this morning by the Labor Department, renewed inflation fears. The Producer Price Index, which measures the price of goods using the manufacturers’ wholesale prices, rose 1.2% in July, the biggest increase in 27 years. This was twice what was expected by forecasters.

Core PPI, which leaves out energy and food prices, rose .8%, versus the .2% rate that was expected. This was the biggest gain in twenty months.

The news was harsh on the stock market. Currently, the Dow is down 124.49 points or 1.08%, to 11348.63, The Nasdaq is 24.30 points or 1.01% to 2392.68 and the S&P 500 is down 12.92 points or 1.01% to 1265.68

Financials also continue to drag down the markets. AIG is down 7%, Lehman Brothers (LEH) is down 7.98%, Goldman Sachs (GS) is down .72% and Merrill Lynch (MER) is down 3.8%

Already struggling Wall Street firms, which are currently faced with billions in losses as a result of the current credit crisis, now have to contend with and account for a not entirely new problem, auction-rate securities or ARS. Auction rate securities are long term debt issued by corporations and municipalities, with a unique interest rate structure that are or were supposed to be reset every week or month, in auctions. That market which at it’s peak, was a $340 billion market, has evaporated, causing the securities to become illiquid, and leaving the banks that issued them potentially liable for billions.

On Thursday 08/07/08, in a settlement agreement with the New York State Attorney General, the Securities and Exchange Commission, and other state regulatory agencies, Citigroup (C) announced that it will offer to buy back at par, auction-rate securities that are currently not auctioning, from all Citigroup (C) individual investors, small institutions, and charities that bought auction-rate securities from the bank before 02/11/ 2008.

The difference between the par price that Citigroup (C) will pay and the “current” market value of the ARS securities,  is being estimated at $500 million. However, to the extent that the ARS market is now very illiquid, with very little demand for them, as well as the fact that more banks will most likely have to follow Citigroup’s (C) lead, creating a situation where there will be a whole lot more of these auction-rate securities on the banks’ balance sheet that they will want to get rid of but with a paucity of buyers, we will probably see another situation like that of collateralized debt obligations or CDOs that the banks have on the books that they have had to keep marking down and for which Merrill Lynch just set a pricing precedent by selling them for $0.22 per dollar of face value.    

As a result, how much of an actual loss to Citigroup (C) this will cost, depends on how much it will be able to get for them in an actual disposition sale. Furthermore, as specified in the agreement, Citigroup’s purchase seems to cover only small investors that would be considered unsophisticated. However, there are also big corporate clients, some of whom currently hold hundreds of millions of dollars of ARS and they certainly will want their money back as well. Some have already filed suit against other issuing banks.

Thursday evening, in following Citigroup’s (C) lead, Merrill Lynch (MER) also announced that it will start buying back in January 2009, the $30 billion in auction-rate securities that its retail clients hold. 

The ARS situation seems to have come to a head this week, as states such as Massachusetts and New York filed suit against several issuing banks for fraudulently marketing auction-rate securities as being very liquid or same as cash, which as being proven now, they are apparently not. Several other states are considering filing their own lawsuits.

Most of the big money center banks and Wall Street firms are exposed to potential losses from auction-rate securities and these auction-rate securities are obviously the next chapter in the credit crisis story. 

Tags: auction rate securities, citigroup, merrill lynch

With stocks rallying rather sharply yesterday 08/05/08, posting their biggest one day gain in four months, the convincing manner in which stocks moved yesterday could turn out to be a bear trap that’s ensnared investors who got in yesterday afternoon, after they saw stocks hold on and tack on to early gains.

Since May 1st of this year and including yesterday’s rally, there have been eleven days in which the Dow Jones Industrial Average climbed at least 100 points. But for July 16th, when stocks climbed 277 points, and then followed through the next day with a 208 point rally, stocks have given up those triple digit one day gains within the following seven trading days.

Note: stocks gained 186 points on July 30th and we have not given those gains back yet because of yesterday’s rally, plus there is not enough data (trading days) to see if the same would apply.

Financials were big gainers yesterday, with Wachovia (WB) up $1.95 to $19.06, Citigroup (C) up $1.09 to $19.92, AIG (AIG) up $3.20 to $29.89, Wells Fargo up $1.36 to $31.54, Lehman Brothers (LEH) up $2.30 to to 20.24 and Merrill Lynch (MER) up $1.83 to $28.22.

These moves present clear near term shorting opportunities and traders should closely watch these stocks. As soon as the rally mode fizzles, short these stocks. If Lehman Brothers (LEH) stock starts giving back from here, a move to just $18 would be a 10% gain for traders shorting the stock!

On July 14, Lehman Brothers (LEH) was trading at $12.40. Financial stocks rallied from there and on July 18th, LEH was at $19.11. The stock fell to $18.32 by the 21st and then rallied again to $21.10 on the 23rd. It was then downhill from there, with the stock back down to $15.27 by July 28th.

Fast moving traders using the current stock market volatility to their advantage, could see a substantial gain in their portfolio. With AIG down from the $60 range at the start of the year, it probably will end the year down, but one could trade the stock and realize at least a 20% plus gain by December.

Merrill Lynch has just announced the pricing for the $8.55 billion share offering that it is conducting to raise capital and help improve its balance sheet. The offering will be for 380 million shares at a  price of $22.50.

Even though the new offering, which will dilute current shareholders, is priced at $22.50, the stock is now trading at $24.90, 10.6% higher than the price the new shareholders will be buying in for. Unless there is more “good” news in the days ahead from Merrill Lynch, the stock should move to the downside over the next few days. Wall Street does not like dilution.

Merrill Lynch has been nothing but negative news this week. It is selling assets on its book at just cents on the dollar, it is financing the purchase of those assets, so to some degree, the balance sheet liability still remains and it is paying Temasek Holdings which is buying the bulk of the stock in the new offering, $2.5 billion to make up for losses in stock that Temasek had bought previously.

Quick back of the envelope calculations, makes one wonder  by how much exactly will the transaction help out MER’s capital position? Merrill Lynch is raising $8.5 billion in a stock offering, but will only get a check for $6 billion, if our math is correct, as it now owes Temasek, $2.5 billion. Temasek by the way is only putting in $3.4 billion not factoring the $2.5 billion they are getting back, into Merril Lynch, with this capital raising.

Merrill Lynch is also selling $30 billion dollars worth of CDOs for $6.7 billion and is financing 75% of this. So we assume that it is only getting $1.675 billion in cash upfront from this. So for what amounts to a $15.25 billion capital raising, Merrill Lynch will only be getting roughly $7.725 billion upfront.

Temasek’s initial investment back in December 2007, was for $4.4 billion. With the drop in Merrill Lynch’s stock price since then, it now has to pay back Temasek $2.5 billion. So one big question facing Merrill Lynch now is whether it can keep its stock price up, since Temasek and we assume anyone else buying into the company’s stock offerings this time around, is only buying in on the condition that Merrill Lynch makes up any difference if there is a drop in the price of Merrill Lynch’s stock.

 MERtemasekmerrill lynchCDOs

Merrill Lynch (MER) announced yesterday evening, that it will be selling off some of its CDO (collaterized Debt Obligations) asset-backed securities, that have basically become the bane to the company’s existence, in an attempt to clean up its books.

According  to the firm, this is a “substantial sale of U.S. super senior ABS CDO securities, resulting in an exposure reduction of $11.1 billion from June 27, 2008.”

This will reduce the company’s CDO exposures to $8.8 billion, from $19.9 billion. As a result of the transaction, the company will take a pretax write-down in Q3 of  ‘08 of approximately $5.7 billion. The write-down will be comprised of a $4.4 billion loss associated with the sale of the CDOs, and $1.3 billion related to other prior CDO transactions as well as a termination of hedges with XL Capital Assurance.

Merrill Lynch’s stock is called a few cents higher in pre-market trading, showing that Wall Street views this transaction as a positive. Now while getting these CDO’s of the books is a very good thing, there are quite a few negatives associated with the deal.

The original value of the CDOs was $30.6 billion. Merrill Lynch (MER) is selling them for $6.7 billion to Lone Star Capital. In other words, it is getting just 21, almost 22 cents per dollar. This set price has implications for other banks that are holding similar assets in terms of by how much they have to write down their values.

Merrill Lynch is providing financing for 75% of the transaction. So the CDO’s get off the books, but until Lone Star pays off Merrill for the CDOs, the company seems to have just replaced a liability on its book with another one.

Also announced, Merrill Lynch (MER) will be selling $8.5 billion worth of stock to raise fresh capital. Temasek Holdings, a Singapore sovereign wealth fund that is already Merrill Lynch’s largest shareholder, will purchase $3.4 billion of common stock in the offering.  Addition shares will be purchased by Merrill Lynch’s executive management team.

This is despite the fact that Merrill Lynch (MER) insinuated in prior releases, that it did not need to raise capital in the near future.

The offering is being conducted as a public offering and as such, will further dilute the holdings of current shareholders.

MERmerrill lynch

Financial stocks have had quite a run-up this past week, with some well-known stocks up as much as 50-60% from recent lows. The underlying fundamentals of these companies have not changed, as Merrill Lynch’s (MER) second quarter earnings release after the close of market on Thursday 07/17, attests. Citigroup’s (C) earnings to be released later this morning will most likely confirm this.

Some of these shares will give back half to all the recent gains in short order. Traders need to start positioning themselves now for what could be very profitable trades.

mermerrill lynch earningscitigroupcitigroup earningsshort financials

IBM (IBM) is putting up respectable earnings numbers. We will see if the stock moves up once the earnings are completely out.

Merrill Lynch (MER) stock moved up as much as three points, but is giving back some of those gains. If Wall Street is happy with the earnings, tomorrow might be another good day for financials, however, we are still waiting for writedown details and other pertinent details that have to do the company’s balance sheet.

Google (GOOG) is getting crushed in the after market. Revenues for the quarter are above expectations, but when you’re used to hitting home runs all the time, anything less will be seen as a disappointment. The stock is down about $58 points in after hours trading.

Microsoft is also putting out earnings that is sending the stock down in after hours. If MSFT and GOOG are down tomorrow, it won’t bode well for tech stocks.