Merrill Lynch
Under fire
Its US$2.5b special 'sweeheart deal' to keep Temasek happy tramples on small shareholders. says Jubak's Journal.
Aug 6, 2008

How Merrill trampled the little guys
The financial giant found itself in a bind, so its CEO pulled a stunt, and the company's core customers got hosed. But there is something they can do to fight back.
By Jum Jubak

I don't care how cheap Merrill Lynch shares get. Why would any individual investor
in his or her right mind buy even one after the scam that CEO John Thain just
pulled?

I thought the idea of common stock is that everyone buying a share gets an equal
piece of the appreciation, if any, and takes an equal piece of the loss.

But Merrill has just paid out US$2.5b to make one great big shareholder, the Singaporean state investment fund Temasek, happier.

At the same time, in order to raise US$8.5 billion in new capital - part of it to
pay off Temasek - Merrill's other investors are going to see their holdings diluted
by 38%.

So on top of the punishment the market has dished out to Merrill shareholders this year - the stock was down 49% for 2008 as of the close on July 30 - Thain has just dished out a 38% haircut.

After the deal is done, existing shareholders will own 38% less of the shrunken company.

But shareholders shouldn't feel utterly outraged. On July 30, the Merrill Lynch
board of directors voted to pay the company's regular 35-cent-a-share quarterly dividend on Sept 3 to holders of the stock as of Aug 14.

A year ago, when the stock traded at $74 a share, that annual dividend of $1.40 amounted to a paltry yield of 1.9%.

On July 30, with the stock at $26.91, the yield has soared to 5.2%. See, Merrill shareholders do have something to feel grateful for.

The running of the bulls

Here's how Merrill's thundering herd trampled ordinary investors.

On July 28, Thain gave in to reality. The company's huge portfolio of securities backed by mortgages wasn't getting any healthier.

The company had already written down the most senior and least risky part of its portfolio of mortgage-backed securities (derivatives called CDOs, or
collateralised debt obligations) to 36 cents on the dollar.

But investors looking at the US$31b face value of that portfolio - plus the US$7.4b
in non-US mortgages, the US$1.5b in somewhat risky Alt-A mortgages, the US$18b in commercial-real-estate loans and the US$18b in mortgages at Merrill's banking subsidiaries - weren't convinced that the company wouldn't have to take even bigger write-offs.

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