Mark DeCambre
According to observers, Merrill requested a recent rating on its bank subsidiary -- a move that usually is a prelude to a debt offering or capital raising initiative.
Already at major shops such as JPMorgan Chase (JPM Quote - Cramer on JPM - Stock Picks) and Wells Fargo(WF Quote - Cramer on WF - Stock Picks), loan quality in unexpected areas has begun to show cracks. For example, JPMorgan, during an investor conference held Feb. 27, said it expects to see home-equity-related losses of about $450 million in the first quarter -- nearly double its forecast from the end of last year. Executives at JPMorgan also were hard-pressed to predict how bad the situation might get in home equity, as the recessionary environment and tighter lending standards among the major financial institutions create a dismal outlook for consumers and homeowners, who piled on leverage during the boom. And it's not just home equity that is giving market participants jitters. Worries about Alt-A mortgages and other presumably higher credit quality loans are growing as consumer sentiment wanes. Expectations also are that unemployment could ratchet up as the teeth of the recession sets in. For financial institutions such as Merrill Lynch, which still have sizable debt remaining on their balance sheets that affects ability to lend, any more strain, even incrementally, can cause major pain. "They've got a big mortgage portfolio; like anyone, they've got problems in terms of the performance of that portfolio," Brad Hintz, an analyst at Sanford Bernstein, tells TheStreet.com. On Thursday, Oppenheimer & Co. financial analyst Meredith Whitney joined Hintz in lowering earnings targets for Merrill. They were among a chorus of pundits who have leveled increasingly negative outlooks on the hobbled firm now run by CEO John Thain. Hintz estimates that through the end of the fourth quarter, Merrill Lynch had approximately $104 billion in mortgage-related paper on its books, including those assets from its banking arm. That number represents approximately 10% of the company's firmwide balance sheet, according to data compiled by Hintz. According to a Bank of America report written by analyst Jeffrey Rosenberg in mid-March, Merrill's mortgage portfolio is about 12% of its overall balance sheet. Rosenberg's report puts Goldman Sachs'(GS Quote - Cramer on GS - Stock Picks) mortgage assets as a percentage of total assets at about 13%; Lehman Brothers(LEH Quote - Cramer on LEH - Stock Picks) at 29%; and Bear Stearns, which is being acquired in a Federal Reserve-led buyout by JPMorgan, at about 33% of total assets. In his Thursday report, Hintz notes that Merrill still has about $30.4 billion in CDOs on its balance sheet at the end of 2007, where values have continued to slip in March. "We believe the biggest swing factor for Merrill's first-quarter 2008 results will be the severity of the writedowns," Hintz wrote. "It will take at least several years for Merrill to fully divest itself of these troubled assets." So far, Merrill has been smacked with some $24.4 billion in writedowns in 2007, according to Bloomberg. UBS' Glenn Schorr says the firm may write down an additional $2.1 billion of subprime debt, leading to a loss in the first quarter, according to a report issued by the analyst on Tuesday. Hintz estimates a writedown of about $4.5 billion. Schorr has cut Merrill from modest first-quarter earnings of 59 cents a share to a loss of $2 a share.
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