Merrill Lynch shocked the market last night when it moved to raise $8.5bn (£4.3bn) through a public share offering to shore up its balance sheet, sold $11.1bn of toxic mortgage securities and took a fresh $5.7bn write-down.

• Julia Kollewe
• guardian.co.uk,
• Article history

Merrill Lynch shocked the market last night when it moved to raise $8.5bn (£4.3bn) through a public share offering to shore up its balance sheet, sold $11.1bn of toxic mortgage securities and took a fresh $5.7bn write-down.

The move came only days after the Wall Street bank unveiled a $4.6bn second-quarter loss and write-downs of $9.4bn related to sub-prime mortgages and risky debts. The latest write-down brings Merrill’s total to $46bn, making it one of the biggest casualties of the credit crunch so far, along with rivals Citi and UBS.

Total write-downs announced by major banks around the world since the start of the crisis a year ago have hit $274bn, and some estimates suggest the figure could reach $1 trillion.

Deutsche Bank analyst Mike Mayo said Citi could post another $8bn write-downs from its CDO exposure, based on Merrill’s figures.

Merrill’s announcement came after Wall Street closed yesterday. Shares in Merrill had ended the day down 11.6% at $24.33, suggesting some traders knew what was coming. The shares rose 34 cents to $24.67 in early trading today, a rise of 1.4%.

Nomura, Japan’s largest brokerage, added to the gloom this morning as it posted a surprise ¥76.6bn (£355m) loss for the three months to end June, compared with a profit of ¥75.9bn a year ago. Revenues crashed 60% to ¥257.9bn because of a slump in trading and new stock offerings.

Merrill’s chief executive John Thain has come under huge pressure to restore financial stability and the bank’s credibility. It recently sold its 20% stake in the financial news provider Bloomberg to raise money and scrapped plans for a new headquarters.

Singapore’s sovereign wealth fund Temasek agreed to buy $3.4bn of the $8.5bn public offering. It emerged today that it will get a $2.5bn rebate on its stock purchase, and could end up with a stake of more than 10% in Merrill. Temasek already invested $4.4bn in the bank last December.

A key player in mortgage-backed collateralised debt obligations (CDOs), Merrill has been hit with huge writedowns after the instruments turned toxic.

Merrill said last night it would sell CDOs with a nominal value of $30.6bn – which it had already written down to $11.1bn – to Lone Star Funds for just $6.7bn. Combined with other new losses, this means the firm will record a pre-tax write-down of $5.7bn in the third quarter.

In addition to the CDO sale, Merrill also agreed to terminate all of its CDO-related hedges with XL Capital, the bond insurance group, and is negotiating settlements with other crisis-hit monoline insurers.

“The sale of the substantial majority of our CDO positions represents a significant milestone in our risk reduction efforts,” said Thain. “Our consistent focus has been to opportunistically reduce risk, and in order to take advantage of this sizeable sale on an accelerated basis, we have decided to further enhance our capital position by issuing common stock.”

Thain was appointed last year to turn around Merrill’s performance, replacing Stan O’Neal, who was ousted after losing the confidence of directors.

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UK banks dive on Merrill shock fundraising

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Retailers suffer worst month in 25 years

* Larry Elliott, economics editor
* guardian.co.uk,
* Tuesday July 29 2008
* Article history

Britain’s retailers have suffered their grimmest month in a quarter of a century as deep price cuts in the summer sales failed to entice wary consumers into the shops, the CBI said today.

The monthly snapshot of the high street from the employers’ organisation found that 61% of businesses said activity was lower in July than a year earlier while only 25% said it was higher.

The CBI said the resulting balance of -36 points was the weakest since it began its distributive trades survey in 1983 and that retailers expected another dismal month in August.

Andy Clarke, chairman of the CBI distributive trades panel, and retail director of Asda, said: “It is turning out to be a very grim summer for many retailers. Pressure from higher fuel and food prices is prompting many people to rein in their spending, proving that value retailing has never been more important.

“The faltering housing market has really depressed sales of home furnishings and white goods this month and the high street is still struggling, but supermarkets are faring better.

“The retail sector will have to focus more than ever on providing good value to customers if they want to keep the sun shining this summer.”

Faced with consumer belt-tightening, the shops and stores surveyed by the CBI had been expecting July to be a poor month for business, but the negative expectations balance of -32 was far worse than the -7 points anticipated. In a potential blow to the rest of the economy, retailers said that they were slashing orders with their suppliers.

The reluctance to spend displayed in today’s report confirms poor recent trading reports from individual retailers such as Marks & Spencer and John Lewis. Only supermarkets and sellers of footwear and leather goods bucked the downward trend. The CBI said sales of big-ticket items were especially weak, with every respondent selling durable household goods and furniture and carpets reporting that sales were down on a year ago. Clothing retailers also suffered.

Howard Archer, economist with Global Insight, said: “The CBI’s July distributive trades survey is a real shocker, pointing to consumer spending starting off the third quarter very much on the back foot. Indeed, evidence is mounting that consumers are now reining in their spending appreciably in the face of seriously squeezed purchasing power and other significant pressures.”
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This article was first published on guardian.co.uk on Tuesday July 29 2008. It was last updated at 12:01 on July 29 2008.

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