How Screwed Are The Investment Banks?

Jul.29.08 | About: Merrill Lynch (MER)

A brief review of recent Merrill (MER) CEO statements:

1. We don't need capital;

2. We could use some capital, but we won't sell shares, we'll just sell some assets;

3. We need to sell shares and raise capital right away;

Where is Ken* when you need him?

The financial firms obviously think investors are utter fools. And for a while, they were correct. They suckered people into buying into this mess the whole way down. Bottom calls each and every level -- all of which failed. Some analysts even called iBanks a "Generational Buys" -- 30% higher.

Only not so much.

Release earnings. Issue guidance. A few weeks later, lower earnings. A few weeks after that, take more write-downs. Raise more capital.  Start it all over again next quarter.

Rinse. Lather. Repeat.

The banks have adopted a Chinese water torture approach -- dribbling out the bad news in small doses over time. Its been working up until now, but I doubt it will keep working much longer. Can they keep fooling people much longer? Merrill issued quarterly earnings on July 17th, and then dropped this bomb shell on July 28th? They must really think we are idiots, and that the SEC is in their backpockets to even attempt getting away with this crap.

Bill King writes that "Eventually a critical mass of investors and traders will become cognizant of the obvious scheme and distrust of financial firms’ results, guidance and motives will increase substantially. John Thain’s credibility is now an issue."

I agree.

Merrill CEO John Thain's Public Statements


via Bespoke Investment Group

But it's not just Thain's rep that is on the line. Look at how much intervention into the formerly free markets is being done under a guise of "Systemic Protection." That catchall rationalizes a lot of really bad decision making by Politburo Central planners senior government officials.

I don't think this process will be fully resolved for quite a while, perhaps as long as 10 quarters. And I would expect that despite the best efforts of the American Communist Party Central Planning Committee SEC, the Treasury Department, and the Federal Reserve, these stocks ultimately end up going lower, and perhaps much lower.

$15 is a very realistic target. But how about single digits? It certainly is a possibility . . .


A History of Merrill's Writedowns


Chart courtesy of Jake



* SEC Chairman Cox, a/k/a Ken