Interest Rate Roundup

Wednesday, October 24, 2007

Mother of a charge at Merrill; Ambac takes its lumps

Merrill Lynch just reported its third-quarter results, and they were ugly. The firm took a whopping $7.9 billion writedown on the value of subprime mortgage positions, leveraged finance-related positions, and Collateralized Debt Obligations. That led to a loss of $2.82 per share, almost six times the 50-cent per share maximum estimated loss Merrill had projected on October 5.

Merrill is getting whacked because, like other Wall Street firms, it plowed headlong into the market for complex fixed-income securities. When push came to shove and investors actually wanted to start selling these things, accurate prices couldn't be identified. The market had disappeared. Now, firms are struggling to get their arms around what these things are really worth -- and the answer is "a whole lot less than par."

Merrill also made what can only be considered a disastrous, poorly timed acquisition of subprime lender First Franklin late in 2006 for $1.3 billion. At the time, this is what the firm had to say about it:

"These leading mortgage origination and servicing franchises will add scale to our platform and create meaningful synergies with our securitization and trading operations," said Dow Kim, president of Merrill Lynch's Global Markets & Investment Banking Group. "This transaction accelerates our vertical integration in mortgages, complementing the three other acquisitions we have made in this area and enhancing our ability to drive growth and returns. We look forward to working with the experienced teams at these companies to serve their clients and leverage our broad range of mortgage products and services."

Er ... not so much.

Then there's Ambac Financial Group, one of the bond insurers who wrap default protection policies around municipal bonds, CDOs and other fixed income securities. It just reported a net loss of $361 million thanks to $743 million in writedowns to the value of credit derivatives


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