Here's a doozy on teh "strength and stability of the firm's core franchise":

"Net revenues for the second quarter were $7.5 billion, excluding these net losses, credit valuation adjustments and a $91 million net benefit related to credit spread widening on Merrill Lynch's long-term debt liabilities. On a comparable basis, these revenues were down 21 percent from the prior-year period but up slightly from the first quarter of 2008, reflecting the strength and stability of the firm's core franchise."

Net revenues are off 21%! Look how strong we are!

@Guy from Delaware and Beentheredoen that - Maybe... but Liechtenstein doesn't really care as much about being "leaned on." That why most desirable tax havens have very little reliance on the US (Cook islands, Channel Islands, Nevis, Caymans, etc.) They are all small countries with minuscule import/export relationships with the US.

If I were the U.S., the way to deter this type of thing is to smack around UBS. But with all the global liquidity problems, the US simply can't "crucify" or "destroy" UBS right now.

@5:33 How does forbidding U.S. citizens from doing business there stop tax evasion? This people are already willing to break U.S. tax law? Do you think they'll care about breaking some other law? Liechtenstein is not a tourist center for U.S. citizens. Moreover, places like Liechtenstein prefer to keep American businesses out of its market.

Secondly, whether you want to believe it or not, the US does need UBS. UBS has a larger market cap than Merrill Lynch and Lehman brothers combined. UBS manages retirement assets for tens of millions of Americans. If UBS failed now, it would be a much more devastating collapse than Bear Stearns.

(as an aside, UBS has probably been the most truthful, forthcoming i-bank in terms of CDO disclosure and write-offs.)

A stone-cold crab-off

Oyster Boy v. Steven Schwartzman

In college, a guy in my fraternity tried to eat 200 starbursts. Once he swallowed one, he had to immediately begin eating the next one.

He got to about 72 than puked on giant ball of starbursts...

Thain embraces the head of Merrill Lynch's Mortgage Backed Securities Desk.

@12:49 - In a word, yes. CFC is now a wholly-owned subsidiary of B of A. Its your prototype drop-down, triangle merger. All of CFC's liabilities are contained to its shell corporation, Red Oak Corporation.

B of A got an insane deal on the CFC merger. The entire purchase price produces an tax savings basically equal to the purchase prise of 2 Billion... so B of A sort of got CFC for free. Down the road, B of A can spin-off (or usurp) the mortgage serving division or other valuable parts of Countrywide. In the meantime, CFC's old liabilities (i suspect) will be left to die in the Red Oak shell.

This is my understanding. Admittedly, I would defer to Dealbreaker editor and former-Skadden wonderboy, John Carney... I'm pretty sure his grades in law school were higher than mine.

I wish people would just stop the "get rid of fancy instruments" argument. If you hear it, its the surest sign that your talking to an uneducated moron.

@8:43 - your post intrigues me. I was not aware of the provisions in the Citi/Merrill Agreements.

Thanks for bringing that up. I'm going to go investigate. If C or MER "can't go back to the trough," potential buyers are going to have some sweet negotiating leverage.

I have no idea why Merrill is crashing.... Though I'm personally not crazy about that anti-ratcheting provision in their latest offering.

If MER is forced to sell off assets to raise capital, I am concerned that MER will not be able to get full value. Potential buyers may know the squeeze is on.

That said, I highly doubt that's the reason behind the Merrill sell-off. That info has been available for a while.

@8:19 - I doubt MER sinks on news of a recapitalization. The track record is that the re-cap has been good for one-day stock movements.

More likely, I suspect (read: pure speculation) that Temasek was getting its short positions in in case the boatload of MER stock it took in exchange for the new funds goes the way of Bear Stearns.

Actually, I guess that's still insider trading. But hardly the kind the government tends to crack down on.

The only situation in which its the really unscrupulous "insider trading" is the ridiculously unlikely case of Temasek overhedging. In which case, Temasek (MER's largest shareholder and holder of full ratchet rights) now perversely prefers MER's collapse...

@9:04 - You can only make that argument if you shorted everything.

If you did, Congrats! You can now spend the rest of your life hitting golf balls on maui, play polo, and cruising the french riveria on your 130 ft yacht.

If not, then your "only person in america" claim is completely shallow.

Put your money where your mouth is.

I'm stunned. Merrill sells a book of "superior" CDO's to Lonestar at 22 cents on the dollar. Merrill thens give a recourse loan to Lonestar for 16.5 cents of the 22 cent price. MER then admits that Lonestar will have no other collateral.

So Lonestar gets 5.7Bil at assets for 5% purchase price. It also enjoys 100% of the proceeds with Merrill taking virtually all of the risk.

I hope I am misunderstanding this... because if that is what it takes to off-load a CDO book, then its apocalypse time.

The whole thing is mind-boggling... This is so much money, it makes no sense that MER didn't disclose this earlier on teh conference call. And this is notwithstanding the 2.5 Bil charge MER took on the re-cap as well. Do do this deal, there's no way MER didn't know two weeks ago that they had adequate liquidity.

@6 - There had to be a holding period right? Maybe like a ballon payment arrangement set out 1-2 years?

At least then MER can hope the CDO market returns enough so that Lonestar can sell these assets and pay back the loan.

Great post...

Almost as good as this classic:

http://dealbreaker.com/2007/11/deutsche_bank_alex_brown_is_th.php

@77 - Bess,
When DB switched over to the new format, the infamous Alex Brown photo got lopped in half. Anyway to correct it?

First they take down LTCM... Then BSC... Man, Goldman must want to run the world.

Austan Goolsbee is your answer. Obama's going to have a University of Chicago guy as his principle economic advisor.

Sure, Goolsbee may say some dumb things this election cycle. But its all nonsense. He'll advise Obama like the free-market, Chicago-style capitalist he is.

Question for those more learned than I:

If LEH issues a warrant on 25% of its outstanding shares, doesn't it massively increase the cost of raising additional revenue?

A hypothetical: LEH issues the warrant. Six months from now, with the credit crisis still roaring, LEH is forced to take even greater write-downs. LEH is forced into issuing new stock to [insert emerging-country wealth fund here]. However, LEH would have a pre-existing duty under the warrant to provide the investor with a 25% stake. Consequently, LEH would take a superflous 25% charge on any new shares issued to cover the rights of the warrant-holder...

So is this a poison-pill type situation? If someone buys the warrant, won't LEH's hands be tied in the long-run?

If I were an investor in this warrant, I'd never let LEH dilute me out of my investment. There could be a profit opportunity here... but there could be a wee bit more danger than I originally thought.

I'd appreciate any insight.