No wonder Merrill Lynch is selling its Bloomberg stake.
The investment bank lost $4.7 billion in the second quarter on nearly $10 billion in new write-downs. That was double what analysts had feared, The Wall Street Journal says on C1. The New York Times in a C1 story on Merrill’s CEO John Thain’s difficulties says the write-downs bring its charge-offs to $41 billion since last summer.
The Journal has the Quote of the Day from the star analyst of the bear market:
“Merrill is a massive ship to right, and that is not going to be possible in a near-term timetable,” said Meredith Whitney, an analyst at Oppenheimer & Co. “Revenue is going down, expenses can’t go down fast enough, and he is now selling the sofa to pay the rent—and next month it will be the dining-room table.”
Merrill is not only selling its 20 percent Bloomberg stake for $4.4 billion, it’s also unloading Financial Data Services for $3.5 billion to raise cash. Why? Here’s a Journal paragraph illustrating the litany of problems facing banks like Merrill:
The latest write-downs included $3.5 billion in collateralized debt obligations, which are securities backed by pools of mortgages or other assets, $2.9 billion in hedges with ailing bond insurers, $1.7 billion in Merrill’s bank portfolio, $1.3 billion from residential mortgage exposures and $348 million on leveraged finance. Merrill also took a $445 million pretax restructuring charge to account for job cuts in the quarter.
The Financial Times on its page one quotes Thain saying he sees no end for the credit crisis.
That’s a silver lining?
It wasn’t all abysmal for Wall Street though. JPMorgan Chase’s profit fell 53 percent—but it still made $2 billion in the second quarter.
The Journal on C1 says its results show a “chasm is opening between the strong and the weak” and reports that PNC bank of Pittsburgh actually increased its profit 19 percent in the quarter.
But in a reminder of the threats still facing the strongest of the banks, JPMorgan CEO Jamie Dimon said that its prime mortgage portfolio was weakening significantly and losses could triple by next year. Most of the losses in the financial industry so far have been in subprime mortgages. The Journal calls this “an ominous sign for the rest of the industry.” And let’s face it, when a 53 percent decline in profit is treated as good news, you’ve got problems.
The Times on C2 says JPMorgan issued $1.1 billion in write-downs and its profits were lower because of credit card losses, as well as those in mortgages.
In other earnings news, Google and Microsoft reported results that were lower than expectations, the Journal says on A1 and the Times on C1. The Journal goes with the “Tech Firms Rise Above Economic Turbulence” angle while the Times headline says “In Surprise, 2 Tech Titans Disappoint.” The FT also uses the word “disappoint.”
State securities regulators raided a Wachovia office in St. Louis yesterday to gather information about its sales and marketing of auction-rate securities—the $330 billion market once sold as a cash alternative, but that’s now been frozen for several months. The Times and Journal both put the news on C3.
The agents were from several states, but Missouri officials said the office was raided because Wachovia hasn’t “fully complied with requests” for records, the Journal reports.
A raid, of course, (especially after something of a stonewall) usually means this story’s worth watching.
Freddie’s fire sale
The Journal leads its page one with a report that Freddie Mac, the little brother of Fannie Mae, is planning to raise $10 billion in stock to shore up its capital and avoid a government bailout—and the regulation that would result. The question: Who would want to buy it?
A sale by Freddie of common and preferred stock could be tough to pull off. For starters, the preferred shares would require Freddie to offer a very high rate of return to attract buyers. The yield on one existing issue of Freddie’s preferred stock, for example, is about 13.8%.
That’s what you call expensive financing. And the Journal says even if it’s successful it might only delay a government bailout. as the paper says “the housing crisis shows no signs of slowing.” Tell that to your cousins at Barron’s.
The two companies’ stocks have risen sharply in the last couple of days after plunging last week. Yesterday Freddie was up 22 percent.
Drip, drip, drip
In economic news, housing starts were weak for the month. They actually rose 9.1 percent in June but only because of a quirk in New York City building rules. Without that change, starts fell 4 percent, the Journal says on A3 and the Times on C7.
New unemployment claims increased to 366,000, up 18,000 on the week.