As Merrill Reports, Short Squeeze in Financials Continues

Includes: C, FNMA, MER
by: Michael Shedlock

MarketWatch is reporting Merrill reports $4.65 billion quarterly net loss.

The firm also said it agreed to sell its 20% stake in Bloomberg LP back to the media company for $4.425 billion. It also plans to sell a controlling interest in its Financial Data Services unit, which has an enterprise value of more than $3.5 billion.

Moody's Investors Service downgraded Merrill to A2 from A1 after the results. The sale of the Bloomberg stake and plans to sell Financial Data Services will cushion the impact of Merrill's second-quarter loss on their firm's capital ratios, the ratings agency said. But it also warned that Merrill has lost some financial flexibility.

Merrill reported $3.5 billion of net losses from its exposure to so-called super senior CDOs. The firm took another $2.9 billion hit from the falling value of hedges it bought from bond insurers. Merrill took another $1.7 billion in net losses from the investment portfolio of its U.S. banks and $1.3 billion in write-downs on residential mortgage exposures.

Citigroup Posts $2.5 Billion Loss

Citigroup shares are up 10% in the third better-than-expected financial report this week.

It was the third better-than-expected financial report from a major bank this week, and Citi's 9.4% rise to $19.56 set up the sector for its third straight day of strong gains.

Citi, the largest U.S. bank by assets, said on Friday that it lost money for the third consecutive quarter after writing down $7.2 billion of investments related to fixed-income weakness and consumer credit woes. The results were a bit better than expected, as some analysts had expected the firm to report write-downs of up to $9 billion.

The U.S. giant is planning to slash around a fifth of the assets on its balance sheet -- as much as $500 billion -- to help it recover from its massive losses in the credit crisis.

Short Squeeze Continues


The financials continue to bleed but the short squeeze continues. Fannie Mae (FNM) is up another 25% today to $13.66 in the wake of Selective Enforcement of Regulation SHOand Bernanke's statement: "It's important for Fannie Mae and Freddie Mac bonds and stocks to rise so they can keep raising capital and aid the mortgage market." 

This move in financials is going to fail spectacularly once the panic buying ends, but for now the bulls are having a bit of fun.