Opening Bell: Marked to Market

The WSJ shines on Merrill's stunner; British-Spanish air merger; disconnected from Alcatel, etc.

Twenty-two cents. We now know the price of those collateralized debt obligations backed by loans foisted by Ameriquest and other boiler rooms on unsophisticated, financially shaky American homebuyers, packaged by Wall Street, rated AAA by Moody’s and its ilk, and sold to yield-hungry pension funds far and wide.

Wow. Twenty-cents on the dollar.

Merrill Lynch yesterday announced it agreed to sell at a steep loss what are widely referred to on Wall Street and in the financial press simply as “toxic securities” to a private equity firm that is either very brave or very foolish. The securities had a face value of more than $30 billion, and the buyer, an affiliate of Lone Star, is paying $6.7 billion. It sounds cheap, but who knows.

The debate rages over whether accounting rules that force firms to mark their securities “to market,” based on some reasonable estimate of what they would bring in a sale, are helping or hurting the financial crisis. Well, no need for for that argument at Merrill. Sam Zell (once considered a wise man) always said that the only appraisal that counts is a cancelled check. Now we have a big one.

And while the news is stunning enough, business press readers should probably pause a moment this morning to admire the work of The Wall Street Journal, which utterly crushes the Merrill story with a team of Susanne Craig, Randall Smith and Serena Ng, with reporting help from Peter McKay and Jason Leow.

This is not to disrespect other accounts from The New York Times or The Financial Times, which are fine, or Bloomberg, which submits a strong entry. (No screaming over there, please.)

It is only to acknowledge the journalistic power the Journal can bring to bear when it feels a story is in its wheelhouse. Reading the WSJ on Merrill this morning is like watching Albert Pujols take batting practice. Point after point of an important story is methodically anticipated and whacked out of the yard.

After affirming the significance of the pricing point, and noting the obvious troubles of John Thain, formerly of Goldman Sach now running Merrill, has getting a handle on Merrill’s problems, the paper includes nice perspective with quotes:

“This is a financial crisis in slow motion,” said Nicholas Bohnsack, operating partner at research firm Strategas Research Partners.

Reminds readers that Thain reversed himself from only a couple weeks ago:

When Merrill posted a $4.65 billion second-quarter loss on July 17, one of the worst in Merrill’s history, Mr. Thain appeared resistant to calls by Wall Street analysts for a fire sale to pare down the firm’s mortgage-related holdings. “I don’t think we want to do dumb things,” Mr. Thain said. “We have not simply liquidated stuff at any price we could get.”

Discusses an obscure deal with a bond insurer.

Meanwhile, New York’s top insurance regulator, Eric Dinallo, helped broker a deal between troubled bond insurer Security Capital Assurance Ltd. and Merrill that would allow the insurer to terminate $3.74 billion of bond-insurance policies it has written by paying $500 million to Merrill.

Includes this stunner of a fact:

Of around 30 CDOs totaling $32 billion that Merrill underwrote in 2007, 27 have seen their top triple-A ratings downgraded to “junk,” according to data compiled by Janet Tavakoli, a structured-finance consultant in Chicago.

That’s twenty-seven of thirty.

And checks in on the buyer:

Lone Star, a Texas private-equity firm, has been buying assets at discounted prices in recent weeks. Earlier this month it agreed to purchase the home-lending business of commercial finance company CIT Group Inc. for $1.5 billion. CIT had also been under pressure to unload poorly performing assets to raise cash.

If that’s not worth $1.50, I don’t know what is.


The WSJ, Bloomberg, and The Associated Press are reporting that British Airways is in merger talks. Followed closely by the Times. (Man, the competition on deal stories is just brutal.)

No longer in service

All papers play up the resignations of the leaders who engineered the 2006 merger that created Alcatel-Lucent. The WSJ says:

Since the merger, Alcatel-Lucent has reported six consecutive quarters of losses, and its market capitalization has been cut in half.

So, I guess we can count that one among the mergers that didn’t work out.

IndyMac, unlamented

The New York Times revisits the collapse of IndyMac and at least makes this important point, if only in passing:

Analysts say the boom perpetuated an insatiable hunger for mortgages and a complacency about the risks they posed.

“The sales culture took over, and the sales division really drove the company,” said Paul J. Miller Jr., an analyst at Friedman, Billings, Ramsey.

For a much fuller account of what went on inside IndyMac, I recommend a report by the Center for Responsible Lending, which we discussed here:


The Los Angeles Times business page continues its good reporting on Iraq contracting. And The Washington Post has interesting story on a reality show hit by the real reality of the housing market.

Has America ever needed a media watchdog more than now? Help us by joining CJR today.

Dean Starkman Dean Starkman runs The Audit, CJR's business section, and is the author of The Watchdog That Didn't Bark: The Financial Crisis and the Disappearance of Investigative Journalism (Columbia University Press, January 2014). Follow Dean on Twitter: @deanstarkman.