Ready for another wave of writedowns? Deutsche Bank analyst Mike Mayo is. On the heels of Monday’s messy news from Merrill Lynch (MER), which sold a huge portfolio of collateralized debt obligations at a big loss and raised yet more capital to offset its latest
round of mortgage-related losses, Mayo is forecasting that Citi (C) will take an added $8 billion in CDO writedowns in its third quarter. The comments come a day after Mayo and another analyst, Merrill’s Guy Moszkowitz, forecast $2.5 billion in third-quarter writedowns at another mortgage-racked investment bank, Lehman (LEH). Shares of both Lehman and Merrill tumbled 10% in trading Monday.
After the market closed Monday, Merrill said it would sell $30.6 billion in CDOs to Lone Star Funds for $6.7 billion – 22 cents on the dollar. The New York-based firm had been carrying the CDOs at $11.1 billion, so the sale forced a $4.4 billion writedown and prompted the company to sell $8.5 billion in new stock to investors including Temasek, the Singapore-based sovereign wealth fund that took a big chunk of Merrill back in December at much higher prices. That capital-raise contained provisions sheltering Temasek from the dilution of its stake, and accordingly Merrill was forced to pay out $2.5 billion to compensate the firm. In turn, Temasek agreed to invest that money and almost a billion more in Merrill’s new capital raising, which contains no so-called reset provisions.
The announcement comes just two weeks after Merrill sold its stake in financial services provider Bloomberg back to the company’s founder, New York Mayor Michael Bloomberg, for more than $4 billion. Merrill chief John Thain said the latest transactions “materially enhance the company’s capital position and financial flexibility going forward.” But like Mayo, many investors are probably more apt to wonder how big the next round of writedowns will be at Merrill’s rivals.
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