Merrill Lynch forced to take emergency action ahead of writedown

Tom Bawden
London Times
Tuesday, July 29, 2008

Merrill Lynch sought to bolster its balance sheet and reduce its risk last night when it announced moves to raise $8.5 billion (£4.27 billion) and the sale of $11.1 billion worth of high-risk mortgage-backed securities.

The group said it would record a $4.4 billion writedown in its third-quarter from the sale of the securities, known as collateralised debt obligations (CDOs), or pools of mortgage bonds, in a disposal that represented the majority of Merrill’s remaining CDO portfolio.

Merrill said it planned to raise $8.5 billion by selling shares equivalent to more than a quarter of its market capitalisation in a move that will significantly dilute the existing investors’ ownership.

Some $3.4 billion of the shares will be acquired by Temasek, the Singaporean wealth management fund. Temasek is already an investor in Merrill, after buying 87 million shares in December.

John Thain, Merrill Lynch’s chief executive, is pushing to reduce risk at Merrill, which has been particularly hard hit by the US housing crisis.

The group has made an overall loss of $18.7 billion in the past four quarters, after taking about $40 billion worth of writedowns on CDOs and other mortgage-related investments. Mr Thain called last night’s CDO sale a “significant milestone in our risk-reduction efforts”.

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