Bearish skeptics of the CDO write-downs have raised concerns that Wall Street banks may still be too confident that the market for CDOs will recover soon. They've accused banks of holding CDOs at above market value based on a belief that the market is facing a temporary, unprecedented "squeeze" rather than a fundamental shift in the risk outlook for these assets.
On today's call, John Thain made it clear that Merrill Lynch is taking the opposite position. When asked by an analyst at CItigroup about the deeper than expected write-downs, Thain replied that in Merrill's view it is unlikely that the market for CDOs is going to recover. He said that the "fundamental assumptions" related to home prices and mortgage defaults had changed. In short, the problem is not a short-term liquidity squeeze but a new view of underlying value. Forget the credit crunch. This is a real shift of economic reality.
Thain also displayed a very detailed understanding of the loss assumptions that underlie Merrill's write downs, noting that the firm is using cumulative loss assumptions on the mortgages underlying asset backed securities of between 16 and 21 percent. This is not quite a "sky is falling" assumption but it is relatively conservative and shows that Merrill is certainly not, to mix metaphors, following the pie-in-the-sky, temporary squeeze assumptions that informed, for instance, Stan O'Neal's comments on last quarter's earnings call.
Posted by , Jan 17, 2008 9:48AM
Not to be a child, but wtf happened to all the pictures??? A picture is worth 1000 words, and 1000 words are simply BORING
Posted by , Jan 17, 2008 9:59AM
knowing the cum loss assumptions is no great feat of intelligence, they are the most important input if you are going to mark to model
Posted by , Jan 17, 2008 10:02AM
Perfectly logical to clear the decks as a new CEO with no responsibility for losses. I'm surprised Citi didn't take even larger writedowns.
Posted by , Jan 17, 2008 10:06AM
Mr. Carney I assume you will be buying shares on John Thain's face?
Posted by , Jan 17, 2008 10:44AM
were F-bombs dropped on the call this morning?
Posted by , Jan 17, 2008 10:51AM
Thain is a very sharp and capable guy, underline three times; the retail franchise is great, with longer term domographics very much in its favor; and the big writeoffs are, as pointed out, clearing the decks. This is one to own, not giggle about.
Posted by , Jan 17, 2008 11:07AM
hahhahaaha 9:59AM said "cum"
Posted by , Jan 17, 2008 1:57PM
I'm surprised no one has picked up on the CLO market. Over 2/3 of all of those crappy LBO loans went into CLOs in the past...now that market is shut down as well.
CLOs will be the next shoe to drop once corporate defaults start rising in 08-09.