Need For Capital At Merrill Lynch, Citigroup, RBS

Flashback April 8, 2008:

Merrill Lynch Chief Executive John Thain said Merrill Does Not Plan to Raise More Capital.

Merrill, which has so far written down $24 billion worth of investments related to the troubled U.S. mortgage market, has no need to raise fresh capital, Thain said in an interview.

Thain also told Japan's Nikkei business daily that he has no plans to sell the company, or merge it with another bank.

Flashback April 17, 2008:

Merrill Lynch Chief Executive John Thain said Merrill Could Raise More Capital After All.

Thain, speaking after Merrill posted a nearly $2 billion loss, said the brokerage giant does not plan to issue common stock but is open to issuing preferred shares.

As reported Wednesday by CNBC, senior executives inside Merrill were dismayed by Thain's statement the previous week that the firm had sufficient capital despite huge writedowns for subprime and other risky assets.

"I wish he didn’t say that," Merrill Chief Financial Officer Nelson Chai said, believing the firm still has balance sheet issues and may need to write down further losses.

Merrill Lynch declined to comment on the executives' statements.

According to people inside the firm, Thain has been amazed at the size and scope of Merrill's subprime-related problems since taking over as chairman and CEO last December.

Despite the turbulence, Thain said the company has $82 billion of excess liquidity to help protect against choppy market conditions.

Dateline April 22, 2008.

Professor Bennet Sedacca is writing on Minyanville:

Come on John

So... Merrill (MER) didn't need capital last week. Yet at the 'low low price' of 8 5/8% they're struggling to sell a large preferred deal announced yesterday as I mentioned.

Now guess what? The company announced a 'benchmark 5 and 10 year deal. Spread talk +310.

I know the spread seems wide at +310, but hey, I can buy mortgages +250 and General Electric (GE) +200. So no, it ain't cheap. Considering 5's are 2.96%, at +310 you get 6%?

For a company that doesn't know it needs capital one week only to issue debt the next week, I wouldn't accept 6%, 7% or 10%.

I'm not kidding folks. And shareholders should be outraged.

Again, this is not acrimony, it's the sheer inability to understand what's happening to the credit markets. And the real sad part? Their firms are making the markets.

Enough said.

So much for Merrill Lynch's $82 billion in excess liquidity.

RBS Capital Raising Efforts

Merrill Lynch is not the only company raising Capital. Royal Bank Of Scotland to Sell $24 Billion in Shares After Markdowns.

Royal Bank of Scotland Group Plc, the U.K. lender reeling from asset writedowns, will sell 12 billion pounds ($24 billion) of shares to investors in Europe's largest rights offer and cut the dividend.

Chairman Tom McKillop said the management team led by Chief Executive Officer Fred Goodwin "has all the ability to steer the bank through this tricky period in financial markets."

My Comment: If they had management ability why did they get so involved in subprime lending and why are they raising capital?

Goodwin offered to step down today, Thomson Financial reported, citing an unidentified source familiar with the matter. The board rejected the proposal, according to the report. RBS spokeswoman Carolyn McAdam declined to comment.

"I'm absolutely amazed there are no casualties, there doesn't seem to be anyone who's taking the blame," said Colin Morton at Rensburg Fund Management in Leeds, England, who owns RBS shares among 1.6 billion pounds under management. "A few months ago they were raising the dividend, now they're having the biggest-ever rights issue."

My Comment: Like Merrill Lynch, it is clear RBS has no idea what it is doing.

Other banks are close to the level where "further credit market deterioration or other unforeseen losses could put them in a position where they need to raise additional capital," JPMorgan Chase & Co. analysts including London-based Kian Abouhossein wrote in a note today.

Things are now so bad that CEOs cannot even get their story straight for a week.

Citigroup Goes Back To The Well

It's no surprise in this corner but Citigroup is back with capital raising efforts, this time with Plans to Sell $6 Billion of Hybrid Bonds.

Citigroup Inc., after posting almost $16 billion in writedowns, is bolstering capital by selling $6 billion of preferred shares in its biggest public debt offering.

The perpetual hybrid bonds may pay 8.4 percent for 10 years, according to a person who declined to be named because terms aren't set.

"They're putting an attractive coupon on it to get it done," said Bill Larkin, a portfolio manager who oversees $475 million of fixed-income assets for Cabot Money Management in Salem, Massachusetts.

Losses on assets tied to subprime mortgages have forced New York-based Citigroup, Merrill Lynch & Co. and other banks to raise more than $160 billion from foreign governments and investors to replenish their balance sheets. Citigroup, which last week posted a $5.11 billion first-quarter loss and cut 9,000 jobs, has raised more than $30 billion in capital since November.

The world's biggest banks are rushing to raise cash after reporting $290 billion in asset writedowns and credit losses since the beginning of last year. Merrill Lynch, the third- biggest securities firm, is marketing at least $300 million of preferred shares at 8.625 percent following its third straight quarterly loss. JPMorgan Chase & Co. raised $6 billion last week by offering 7.9 percent hybrid bonds in the New York-based bank's biggest sale of the securities.

Citigroup's writedowns and credit losses from the collapse of the subprime mortgage market now total $40.9 billion, more than those reported by Zurich-based UBS AG and Merrill.

"The company has seriously constrained earnings power," Meredith Whitney, an analyst at Oppenheimer & Co. in New York, said today in a report. This may force Citigroup to "seek additional capital from outside investors."

Vikram Pandit, Citigroup's chief executive officer, said he was "not happy" with the results. He said he's selling assets to free up capital and shedding units outside the company's "core" retail banking, trading, investment-banking and transaction-processing businesses.

The need for capital increases every day. The only thing that changes is the spin denying it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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