Monday, September 15, 2008

A deal for Merrill....

It has been reported that a deal has been stuck between Bank of America to buy Merrill for $29 per share. This after Merril closed on Friday at $17(ish). A couple of questions....

1. Why did Bank of America pay so much for Merrill ? I could only assume that it was not necessary to pay so high.
2. If Merrill was worth $12 above Friday's closing price why did they have to sell?

I do think it is wise. First they were able to command a sizable premium and second it was only a matter of time before they would have faced a similar fate. I think there is a new world order. As I have written about before, Investment houses can not survive alone. It is better to "merge" from a position of (relative) strength rather then total weakness(Bear Stearns).

"I think John Thain at Merrill is the ultimate realist," Ms. Bush said, the analyst, who expected federal regulators to bless the deal by relaxing deposit limits for bank-holding companies. "He knows if Lehman goes under he is not far behind. He wants to cut the best deal he can."

In the past 15 months, Merrill and Lehman have both had tens of billions of dollars worth of risky, illiquid assets carried on balance sheets that were leveraged at a debt-to-equity ratio of more than 20 to one. When the credit crunch hit in mid-2007, the assets kept deteriorating in value and couldn't easily be sold, eating into both firms' capital cushion. Recently, Lehman's balance sheet topped $600 billion and Merrill's $900 billion

Also it is being reported that the Fed is now going to accept a wider variety of assests at the discount window, stocks included. Isn't this kind of like intervening in the stock market?

AIG is also scrambling to raise cash, this on the back of an expected downgrade from S&P. They are looking to raise another 40B dollars. From what I am reading it is not that they necessarily need the money but rather they are tryiny to raise it in anticipation for margin calls that will come from the lower rating, and therefore lower share price.

As recently as Thursday, AIG said it was sticking to a schedule to unveil its strategic plan on Sept. 25. But its shares fell 31% on Friday. Late that day, Standard & Poor's warned that it could cut AIG's credit rating by one to three notches, citing concerns that AIG would have difficulty raising capital. Such a step would make it more expensive for AIG to borrow and further undermine investor confidence in the company

This is a panic market and I am sure opportunites are abound, but you have to be pretty brave to be sticking your hand out in these markets.

The Dollars is following Friday's session opening considerable weaker. U.S. Dollar interest rate futures are also rallying, with the yield curve steepening out tremendously.

Good Luck and Good Currrency Trading


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