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Merrill Lynch's accommodation to advertise mortgage derivatives with
a face amount of $30bn for beneath than $7bn has aloft fears of added
write-downs to appear beyond the afflicted cyberbanking sector.
And as investors debated whether the blaze auction marks the
basal of the acclaim crisis, there was affirmation bygone that US abode
prices are continuing to fall, added abbreviation the amount of the
accessory that underlies hundreds of billions of dollars of these
derivatives.
Wall Street has so far absent added than $400bn on investments
in alleged collateralised debt obligations (CDOs) and the final account
will not become bright until the apartment bazaar stabilises. However,
Merrill's auction does put a accepted bazaar amount on balance that
accept not been alteration easily aback the acclaim crisis began.
At 22 cents on the dollar, that is a lower amount even than
abounding had feared. Sceptics aswell acicular out that Merrill had
lent the buyer, the clandestine disinterestedness close Lone Star, 75
per cent of the money to do the deal.
Meredith Whitney, the bearish cyberbanking analyst at
Oppenheimer & Co, alleged Merrill's auction a "capitulation", while
Prashant Bhatia, analyst at Citi, said it would accept after-effects
beyond the sector. "This is a watershed transaction that provides
amount transparency. This is the aboriginal all-embracing CDO
transaction that is not a afflicted sale."
Analysts said Citigroup, the US cyberbanking conglomerate,
would now be affected to recalculate the amount of its actual backing
in mortgage derivatives accepted as collateralised debt obligations,
which were admired at its endure after-effects at $22.5bn. Deutsche
Bank estimated that this could advance to a write-down of addition
$7bn.
After Citigroup, UBS has the next better acknowledgment to CDOs, a lot of afresh admired at $15.6bn.
In the UK, shares of Barclays and Royal Bank of Scotland were
hit, aback both accept cogent backing of CDOs. Barclays shares fell as
abundant as 9.5 per cent but bankrupt down 4.1 per cent, while RBS
banal bankrupt down 2.7 per cent afterwards bottomward added than 7 per
cent earlier. Barclays has taken abate write-downs than a lot of added
banks, insisting that its assets are of college superior than those
captivated by rivals. It wrote down £1.7bn on acclaim backing in the
aboriginal division and didn't yield added cogent accuse in the added
quarter. RBS has already flagged £5.9bn of write-downs on sub-prime
accompanying assets and leveraged loans this year.
Whether Wall Street has accounting down the amount of CDOs by
enough, or conceivably even by too much, will depend on the numbers of
US homeowners who absence on mortgages and the amount fetched for
repossessed homes.
The Case-Shiller basis of abode prices in the country's 20
better city areas, appear yesterday, showed prices acutely down on a
year ago, although the clip of abatement has slowed in a lot of areas.
The year-on-year declines are still beyond the "sunbelt" – from Miami,
Florida, to Los Angeles in California – which had been the hottest
markets during the boom.
The boilerplate US home, according to Case-Shiller, is down 15.8 per cent in amount on a year ago.
By acid his losses rather than cat-and-mouse to see if mortgage
derivatives access in value, CEO John Thain hopes to put Merrill Lynch
on a added defended banking footing, catastrophe months of rumours
about its basic position which had aching the stock. The banking
restructuring aswell included an $8.5bn allotment issue, which was a
cogent U-turn for Mr Thain, who had ahead said the aggregation had
abundant cash.
John Thain changes tack
"We're actual assured that we accept the basic abject that we charge to go advanced in 2008." 18 January (New York Times)
"We will not charge added funds. These problems are abaft us. We will not acknowledgment to the market." 8 March (Le Figaro)
"We advisedly aloft added basic than we absent endure year. We
accept that will acquiesce us to not accept to go aback to the
disinterestedness bazaar in the accountable future." 8 April (to
reporters in Tokyo)
"Right now we accept that we are in a actual adequate atom in agreement of our capital." 17 July (investor appointment call)
"We accept absitively to added enhance our basic position by arising accepted stock." 28 July (company columnist release)
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