A Merrill Lynching

As recently as July 17th, a mere 12 days ago, John Thain said he was "comfortable" with Merrill's capital position. Yesterday, however, Thain announced that Merrill had diluted the shareholders, invoked a full-rachet provision, and performed a seller-financed transactions of CDOs to the Lone Star Funds. I imagine that his idea of "uncomfortable" involves being on the receiving end of two large Singaporeans named Victor-Tan with some brass knuckles.

There are several conclusions that he put out in the open:

1. Merrill is desperate for cash. They paid a $2.5B penalty to raise $8.6B.

2. Merrill could not sell the CDOs without seller financing, indicating that 22¢ on the dollar is an upper bound on the value of their super-senior AAA CDO debt.

3. He made no comment about marking simliar or inferior debt appropriately. Given his past behavior, we can reasonably assume that there is much on (and off) the balance sheet that has yet to be properly valued.

4. The lack of similar commentary from other CEOs in the financial world on these markdowns means that there is a great deal of pain still to come.

As I write this, the early action in financials is flat. So perhaps some enterprising young hedge fund manager is donating his clients' money to propping up the stocks of financials for a while longer. (Those young hedge fund people are SUCH nice guys.)

Finally, I note that a quick sampling of comments from the morning blogs indicates that there is an angry mob in the wake of Thain's announcement. Is that the sound of sharpening pitchforks?

Update: Great post over at The Big Picture. Here is a summary of Thain's comments to date: