Merrill's Restructuring: On the Right Track, But...

Well, Merrill just provided the market with a great example of what a bank has to do to achieve the results of a good bank/bad bank split:

1. Take a massive write-down of its illiquid asset portfolio;
2. Fulfill a colossal make-whole agreement on prior financing rounds by rolling down the prices of earlier offerings; and
3. Issuing billions in fresh capital at sharply depressed prices.

Net net, rather than doing a classic good bank/bad bank bifurcated structure, it bit the bullet and did the whole thing internally. $40 billion in write-downs in the past year. Additional payments to financing sources that were massively underwater, except for the fact that their paper contained reset options in the event that fresh equity was sold at lower prices within a prescribed time period. And oh boy, were the prices ever lower and did it ever happen within the prescribed time frame!

My question is: after all this, is there even more to come? As reported by the Wall Street Journal, Merrill's CEO said the following:

Chief Executive John Thain said the securities represented the "substantial majority" of Merrill's collateralized debt obligation, or CDO, positions, calling the sale "a significant milestone in our risk reduction efforts."

Can anyone out there tell me what a "substantial majority" is? If you are going to go through the pain and suffering of such a restructuring, don't you think it would make sense to either write it all down or to provide transparent disclosure of what was written down, what remains and what management thinks the realization on the remaining pieces will be? I just don't get it. If we believed bank CEOs every time they said "The worst is behind us" we'd all be in the poor house.

Come on, John. Better disclosure, my man. You have the chance to take the leadership on best practices in this area. Because without it, you and your banking buddies are still leaving investors with a murky outlook, and your share prices will continue to reflect this lack of confidence.

Update: Here is a more detailed article from the WSJ.

Comments

[praxis22]

In today's world of full transparency, "substantial majority" = 50%

Alphaville is definitely the place to go for MER news at present:

http://ftalphaville.ft.com/blog/2008/07/30/14814/merrill-number-crunching-long-edition/

[praxis22]

Yup,

Alpahaville is the place to go for what's going on with Mer. They wrote down 50% So they have another 50% left.

http://ftalphaville.ft.com/blog/2008/07/30/14814/merrill-number-crunching-long-edition/

[Scott_H]

There's some question out there about whether or not MER's hand was forced by National Australia Bank. What's not clear is, who forced who's hand? Given the timing of things, it looks like NAB may have forced MER's hand.

http://ftalphaville.ft.com/blog/2008/07/29/14786/we-knew-about-the-merrill-writedown-on-friday-didnt-you/