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NEW YORK - MERRILL Lynch said it will take a US$5.7 billion (S$7.8 billion) third-quarter write-down as it sells risky debt, and raise US$8.5 billion by selling new stock.
The developments came less than two weeks after Merrill posted a US$4.9 billion second-quarter loss, hurt by more than US$9 billion in write-downs. Merrill's stock sale includes US$3.4 billion to Singapore's state-run Temasek Holdings, already one of its largest investors.
The latest write-down and plans to raise capital may raise further questions about Chief Executive John Thain's ability to turn around Merrill.
'Are things that much worse than we were led to believe?' said Mr James Ellman, president of Seacliff Capital in San Francisco. 'If people were going to believe Thain when he said Merrill raised more capital than it needed to and had taken conservative marks on its securities book, I'm not sure they're going to believe him tomorrow morning.'
The Wall Street investment bank and full-service brokerage has lost US$19.2 billion in the last year and suffered more than US$40 billion in write-downs.
Lenders including Merrill, Citigroup and UBS have announced more than US$400 billion in write-downs and credit losses since the global credit crisis began a year ago.
Temasek
Temasek invested US$5 billion in Merrill in December and February at US$48 per share. The shares are now trading at about one-half that level.
Merrill said it agreed to sell US$30.6 billion in collateralised debt obligations (CDOs), essentially repackaged mortgage bonds, to an affiliate of private equity fund Lone Star Funds for US$6.7 billion. This will result in a US$4.4 billion write-down, Merrill said.
The company also agreed to help bail out struggling bond insurer Security Capital Assurance by agreeing to cancel US$3.5 billion in credit default swaps and end litigation in return for US$500 million in cash.
Merrill said the settlement, together with the potential settlement of other CDO hedges, will result in a US$1.3 billion write-down.
'The sale of the substantial majority of our CDO positions represents a significant milestone in our risk reduction efforts,' Mr Thain said in a statement. He said the sale and the stock issuance 'will materially enhance the company's capital position and financial flexibility going forward'.
Mr William Smith, president of Smith Asset Management in New York, said Merrill fetched a 'horrendous' price for the CDOs.
'The problem here is with Thain. You can throw him into the credibility problem camp now,' Mr Smith said. 'It's tough to call the bottoms on these things because it seems like it's never ending, but this could be viewed as the watershed.' Temasek was not immediately available for comment.
Earlier this month, Merrill completed the sale of its 20 per cent stake in Bloomberg, the news and financial data company, to Bloomberg for US$4.43 billion. -- REUTERS
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