Thursday, January 10, 2008

Citigroup and Merrill Lynch’s Fire Sales (C; MER)

Following up on the WSJ's front-page story on "The Shame of the Street" (should I copyright that?), here's the WSJ's Deal Journal blog:

Investors in Citigroup and Merrill Lynch may be forgiven for not greeting news this morning of as much as $14 billion in new investments with alacrity.

As The Wall Street Journal reports in this Page One article today, Citigroup and Merrill are going “hat in hand” to the Middle East and Asia. Merrill is seeking as much as $4 billion in fresh capital, while Citigroup is looking for as much as $10 billion. All else being equal, such massive inflows would be cheered by shareholders. But all else is far from equal here.

Existing investors in the companies may want to focus on an even more staggering number in the article: $25 billion. Those are the additional losses from soured housing-related investments that Merrill and Citigroup are said to face. There also are questions about how politicians are going to react to what looks on the face of it a bit like the mortgaging of Wall Street to foreign governments. Potentially worse yet, it is hard to call these investments anything less than fire sales. After all, the stocks of both firms are down a jaw-dropping 45%-50% in the past year....MORE