Talk of Writedowns Hit Merrill Lynch and Others (MER, BSC, MS)

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This is just becoming all too familiar in the financial stocks, and the bears are still in charge since we can’t hold a major up-day.  Merrill Lynch & Co. (NYSE: MER) is feeling the wrath of writedown rumors today.  It has been seen with a sharp drop in the stock today, and it has also been seen with major volume in put options.  The March options expire tomorrow, so traders are going out to April with more than 120,000 put contracts in the April 18 expirations trading hands.

The company already announced it was suing SCA over written down assets but that is on old and already written-down numbers according to contacts.  More importantly, the talk is on yet another major writedown coming soon.  The figure vary from source to source, but the figures started out as being "more than $5 Billion" today.  Then we were told it could be $10 or $12 Billion, and someone else that is close to many primary brokers noted that $15 Billion is what some are talking about internally at Merrill Lynch.

Before you go jump out the window, please keep in mind that this is all based on what traders and brokers are talking about today.  These aren’t rumors as much as they are traders trying to factor in as much as they can in more write-offs.  It is also on the week of the big brokerage firms reporting earnings.  What should be expected is that more writedowns ARE COMING without question.  There is no way those writedowns will end suddenly, and the sad part is that many assets are bing written down to a "mark to theory" basis.

Bear Stearns (NYSE: BSC) was a winner yesterday on many rumors of better solutions coming, although that also now feels like it was a long time ago.  Morgan Stanley (NYSE: MS) is still positive today after its earnings beat expectations.

What is more important than any big numbers here by far is the notion of what write-offs will be paper and what write-offs will cause implosions.  If it is merely on paper and broker and bank counterparties don’t cut the institutions off, then the talk may be wasted time.

Outside of that, you’ve probably already gotten used to seeing writedowns from major financial institutions either each day or each week.  Even if S&P was right about being past the halfway mark, that isn’t going to end immediately.

Jon C. Ogg
March 19, 2008