Expect Huge Writedowns for Merrill Lynch and Citigroup

Merrill Lynch and Citigroup report their most recent quarterly earnings (and their writedowns) this Thursday and Friday, respectively. Earnings season and options expiration week make for a volatile mix. Expect Mssrs. Thain and Pandit to blow the top off this powder keg. I know I would.

Think about it. If this were a game of Monopoly, Mssrs. Thain and Pandit have the mother of all get out of jail free cards. They can write down to their heart's content and then some while blaming the writedowns on their departed predecessors, Mssrs. O'Neal and Prince.

And what, pray tell, will they do when in the not too distant future they find the writedowns were too aggressive? Why I guess they'll just have to admit their mistake and write the value of the assets up giving a turbo boost to their earnings. It's a pretty simple process really and makes too much sense for it to not happen.

Step 1 - Slash and burn everything on the balance sheet. Just be careful not to mortally wound the capitalization metrics unless you've got a Sovereign Wealth Fund or some other ginormous money investor standing by with a capital infusion.

Step 2 - Blame everything on the prior regime. Remember it's called business, not friendship.

Step 3 - Repeat Steps 1 and 2 next quarter if necessary. If not necessary, proceed directly to Step 4. Word of caution; there are probably no more than two of these bullets in the chamber. Pull the trigger a third time and people will begin to think the problem is you.

Step 4 - Sit back, keep a straight face and get ready to count the money as you blow the doors off a disgustingly easy year-over-year comparable in next year's calendar Q1.

Not sure what kind of odds are being laid on the over/under with regard to Merrill's $5B in expected writedowns and Citi's $12B in expected writedowns. You can participate in and see the results of a poll taken by Bespoke here. Seems to me the smart money would be on the "over". What will be really interesting will be the reaction on the Street.

Comments

[Urbane Gori...:]

I agree... I also expect 'write-ups' later this year or early next year. My thinking is exactly as stated above. New management will take this opportunity to beat up the old management and then perform a 'miracle turnaround' later. I expect that the impetus for the turnaround will be a 'repo market bottom' coupled with a stronger economic upturn. First quarter next year? Watch early indicator sector changes for the upturn and then watch the fun!

Thx jegan ;-)

2008 Apr 15 10:32 AM

[Robert Burns:]

It's plain to see that Citi can't deal with debt or deadwood and trying to sell their deadwood at 90 cents on the dollar will lead to a bigger writedown. How will they handle this debt? Why of course they'll buy a debt collection company and pay themselves. What's new?

2008 Apr 17 09:20 AM