Leading global banks including Citigroup and UBS on Tuesday faced renewed pressure to write down or sell billions of dollars in toxic assets following Merrill Lynch’s disposal of $30bn in mortgage-related securities at a cut price.
Merrill’s move to sell collateralised debt obligations (CDOs) for $6.7bn, or 22 cents on the dollar – announced on Monday night – raised hopes that other banks would be able to strike similar deals and purge their balance sheets of bad assets.
However, the low price paid by Lone Star Funds, a distressed debt investor, to buy Merrill’s CDOs sparked fears that the financial system could enter another spiral of huge writedowns followed by highly dilutive capital raisings.
Merrill on Tuesday raised $8.5bn – to offset $5.7bn of writedowns caused by the CDO sales and other losses – by selling shares at $22.50, a 7.5 per cent discount to Monday’s close.
Mike Mayo, Deutsche Bank analyst, said Merrill’s action, a fortnight after John Thain, chief executive, said that it did not need more capital, “raises ongoing credibility issues for the industry”.
William Tanona, Goldman Sachs analyst, said that if Citi were to write down its $22.7bn of CDOs to the levels implied by the Merrill deal, it would have to take a $16.2bn writedown. Citi said this month that it valued its CDOs at about 61 cents on the dollar. Citi declined to comment. However, people close to the company said that the bulk of its CDOs dated to years prior to 2005 – before the onset of the housing crisis. As a result, they said that Citi was comfortable valuing them at current levels.
UBS, which had $6.6bn in CDO exposure at the end of March, declined to comment.
Merrill’s latest capital raising will dilute many existing shareholders.
However, Temasek, the Singaporean investment fund that invested $5bn in Merrill last year, will receive $2.5bn to compensate it for paper loss on its original investment.
Temasek has agreed to use the money as part of a $3.4bn investment in the latest offering. The Kuwait Investment Authority is in talks to secure a similar deal.
Merrill’s shares, which fell sharply on Monday, were flat at midday in New York.
Additional reporting by Hal Weitzman in Chicago
