NEW YORK - Merrill Lynch & Co.’s latest move to clear failed credit market investments from its books is likely to pressure other financial companies to dump their troubled holdings — and, like Merrill, at a steep discount. But another round of write-downs or asset sales won’t raise investors’ ever-sagging confidence in the sector.
Merrill said late Monday it was selling repackaged mortgage-backed securities for $7 billion — just weeks after they had been worth $31 billion, giving them a current value of about 22 cents on the dollar. Analysts believe that sets a new and very low benchmark that other Wall Street banks — including Citigroup, Lehman Brothers Holdings, Morgan Stanley, and JPMorgan Chase & Co. — might have to meet when valuing their own investments.
There’s been speculation among analysts that the move could have been forced by regulators to reduce the company’s risk position, or perhaps to stave off a rating downgrade.
Merrill sold assets including collateralized debt obligations, or CDOs, which are securities backed by pools of mortgages. While analysts believe Merrill has been one of the biggest holders of these securities that have plunged in value over the past year, other banks will also need to unload their portfolios.
“We expect peers will adjust marks (prices), eliminating an incentive to hold on to impaired assets,” said JPMorgan analyst Kenneth Worthington in a report. “We see this a part of the cleansing process.”
Deutsche Bank analyst Mike Mayo said Merrill’s asset sale might especially portend trouble for Citigroup. He said the bank might have to write down about $8 billion in the third quarter from its exposure to CDOs. Citi has $22.5 billion of net CDO exposure, and based on Merrill’s write-downs, the bank could have another $7 billion of write-downs.