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Once again, the analysts are trailing the market. Merrill Lynch has upgraded Morgan Stanley to “buy” from neutral:
13 Oct 2008 14:12 EDT *DJ Morgan Stanley Raised To Buy From Neutral By Merrill Lynch
It’s just a matter of time before the others now follow. Meanwhile, we hear that Trump Entertainment has been downgraded. That’s probably another of those “just a matter of time” scenarios too.
As we predicted last night, shares of Bank of America are falling today after it announced that it was acquiring Merrill Lynch. The stock is off around 15 percent this morning. Because the acquisition of Merrill is an all stock transaction, with Merrill shareholders receiving 0.8595 shares of Bank of America for each share of Merrill, the stock movements mean that the market is now pricing the shares of Merrill significantly below the $29 per share first announced. Bank of America is now paying $24.63 for a share of Merrill.
Merrill shares continue to trade at a discount from Bank of America’s, although you have to be cautious about reading too much into merger spreads in all stock deals. This could be a bet on further declines of bank of America stock, or a pricing of risk that the deal will not actually close. Alternatively, it could simply reflect the presence of speculative arbitrage in the market.
That’s the claim of a Merrill Lynch banker who has written to Here Is The City, a financial news and gossip site based in Britain.
“I wonder what the implications really are, and am concerned that the freeze itself is just a marker which firm executives are putting down to signal that there are much tougher times ahead,” the banker writes.
The banker emphasizes that he has not “got it in for my firm” but speculates that the hiring phrase will last much longer than the anticipated 20 weeks. “[I]t will remain difficult to obtain additional headcount throughout 2009,” he writes.
The entire letter, including the requisite Stan O’Neal bashing, is on Here Is The City. (Thanks to Hilary Lewis at the Business Sheet, who brought this story to our attention.)
Merrill Lynch announced that it was going to move its earnings conference call from a pre-market 8 am time slot to after the market closes. Of course, in the current climate this prompted all sorts of concerned or gleeful whispers (depending on whether you were long or short Merrill). The last Wall Street firm to opt for a post-market call was…wait for it…Bear Stearns.
So what’s the real story? Is this a sinister development portending dire earnings news or does Merrill just hate its analysts and wants them to burn the midnight oil? After jump, BreakingViews.com‘s gets to the bottom of Merrill’s time slot switcheroo.
We’re snacking this morning on the delicious irony that Merrill Lynch’s stock is getting hammered by rumors that it will announce new losses from Alt-A mortgages on the same day that analysts at Merrill Lynch cut their earnings outlooks for several large regional banks, and predicted dividend cuts from Bank of American and Wachovia. It’s credit crunch for breakfast!
While many on Wall Street focused on the second quarter earnings of Lehman Brothers, they may have overlooked something odd that occurred behind the scenes. In connection with this morning’s earnings report, Lehman issued a detailed financial appendix breaking down its balance sheet by various asset groups. But behind the numbers there was another story–the story of a persistent bit of data that no one caught until it was too late.
More after the jump.
One thing we’ve noticed recently is that the chorus of dissenting voices inside of Merrill Lynch has quieted in recent months. In the weeks after John Thain replaced Stan O’Neal as chief of Merrill, the securities firm was bitterly riven as executives scrambled for authority (and, of course, money…always money) under the new regime. But by all accounts Merrill is a quieter, happier place these days.
This is a testament to the effectiveness of Thain’s leadership. But we wanted to know: how did he do it? After the jump, we explain why we think something Thain said on Wednesday indicates what happened.
Is it a coincidence that the first public statement from a chief of a Wall Street supporting extending the Federal Reserve’s discount window for securities firm came from Merrill Lynch, which enjoys the lowest leverage ratio on the Street?
There’s no question that any move to make the new Fed borrowing facility a permanent feature of our financial infrastructure will be accompanied by a new regulatory framework. Whoever pays the piper calls the tune, as they say. One feature of the new regulations will likely be a cap on leverage for firms with access to the facility.
Especially when compared with banks, securities firms are heavily reliant on leverage to boost returns. But some are more reliant than others. John Thain, who yesterday called for the window to be extended beyond its scheduled expiration in September, runs Merrill Lynch, which just happens to have one of the lowest leverage ratios–the measurement of how much a firm borrows compared to its equity–on Wall Street. He even indicated that he’d be willing to accept a cap below the 23.8 ratio his firm reported at the end of the last quarter.
Merrill’s competitors have higher ratios. Lehman’s leverage ratio, which was recently as high as 32, is now down to 25. (But the firm stressed it did not want to go any lower). Morgan Stanley’s last reported leverage ratio was 33. Even Goldman Sachs has a higher leverage ratio, at 24.
In short, Merrill may believe that it stands to gain from new regulations that push its competitors to adopt the kind of conservative ratios it has already put in place.
At a gathering of Wall Street dealmakers yesterday Merrill Lynch chief executive John Thain said he hopes the Federal Reserve will continue to permit securities firms to borrow from a new Fed facility launched amidst the implosion of Bear Stearns. We couldn’t help but notice, however, that Thain seemed a bit worried that the Fed isn’t going to keep the window open. To paraphrase a popular saying on Wall Street, “hoping” the Fed window stays open is not a strategy.
“I think it should stay available to the banks and investment banks — the primary dealers. It’s important that it does stay available,” Thain said to the audience at the Wall Street Journal dealmakers conference at the posh Pierre Hotel in Manhattan.
It had been widely assumed that the facility would be continued after its scheduled expiration in September. But recently opinions have shifted, with some reading the recent warnings from several Fed officials as indicating the window will be closed. What’s more, the investment banking community is said to be split on whether they should have continued access to the window. Goldman Sachs is said to be leaning toward opposing a move to make the borrowing facility permanent, and Lehman is said to support the move. Morgan Stanley reportedly takes a middle position, wanting to wait to see the kind of regulation that would accompany the window.
This is the first time we know of that a securities firm has gone on record with its support of keeping the window open. Thain’s decision to take this stance seems to indicate that he is taking seriously the idea that the Fed will not keep the facility open beyond September.
Merrill’s Thain Urges Fed To Extend Lending Deadline To Brokers [Dow Jones]
Merrill CEO wants ongoing Fed access, rules reform [Reuters]
Blackstone has replaced its chief financial officer with a top executive poached from Merrill Lynch. Laurence Tosi, who has been at Merrill for nine years and most recently was the chief operating officer of its investment banking division, will replace Michael Puglisi, a 14 year Blackstone vet.
The move by Tosi is being read by the cynical in two ways. First, it may be a sign that internal friction among the top executives at Merrill continues. Following the resignation of Stanley O’Neal, who appointed Tosi to his spot, and the rise of John Thain, there was lots of talk of internal wrangling at the bank. Lately the internal situation has quieted as executives adjusted to new leadership. But a high-level defection is sure to re-ignite whispers of internal dissent.
The second cynical read of the move highlights a structural change on Wall Street. As investment banks and brokerages lower leverage and come under deeper regulatory scrutiny, the relative power and profitability of alternative investment houses like Blackstone is sure to rise. Could Tosi’s move be further evidence of the coming decline of traditional investment banks and the ascendancy of the increasingly hybrid Blackstone, which many describe as a budding investment bank disguised as a buyout shop?
Or, you know, may he just wanted a new job and more money. But, as Nick Walker says in one of our favorite movies, “It would be better if it meant something.”
Blackstone appoints new CFO [Reuters]
