DealZone

Merrill Lynch: Don’t forget the salt

July 29, 2008

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Analysts are applauding Merrill Lynch’s attempt to cut its losses and raise more capital, but investors may be forgiven if they take the company’s remarks with several large grains of sodium chloride. CEO John Thain repeatedly insisted that Merrill was well-capitalized over the last eight months, yet the bank still had to go back for another $8.5 billion.

Below are a selection of comments by Thain and other executives, in reverse chronological order.

“Right now we believe that we are in a very comfortable spot in terms of our capital.” (July 17, 2008 — Thain on a conference call after posting Merrill’s second-quarter results)

“Today on a pro forma basis we have about $44 billion of equity capital, which actually isn’t very much below the all-time high that Merrill ever had. And our philosophy about this is that we are well-capitalized. We’re comfortable with our capital position. We, like everyone else, are deleveraging our balance sheet.” (June 11, 2008 — Thain on a conference call hosted by Deutsche Bank)

“John Thain has been very clear that we have sufficient capital and don’t have a need to raise additional common equity for the foreseeable future. When we raised this capital in January, we had a lot of demand so we went beyond what we needed.” (May 12, 2008 — Merrill President Greg Fleming in an interview with the Times of London)

“We deliberately raised more capital than we lost last year … we believe that will allow us to not have to go back to the equity market in the foreseeable future.” (April 8, 2008 — Thain to reporters in Tokyo, as reported by Reuters)

“In 2007, we lost 8.6 billion dollars after tax, but we raised 12.8 billion dollars in new capital. We raised significantly more capital than we lost. And we did that on purpose so that we could say to the marketplace that we raised more than enough capital. We replaced all the capital we lost. We have plenty of capital going forward, and we don’t need to come back into the equity market. The goal is to maintain our current ratings. No more capital raising; I’m sure we have enough capital.” (April 4, 2008 — Thain in an interview with Japan’s Nihon Keizai Shimbun)

“We have more capital than we need, so we can say to the market that we don’t need more injections. We can confirm that we have tackled the problem.” (March 16, 2008 — Thain in an interview with Spain’s El Pais newspaper)

“…Today I can say that we will not need additional funds. These problems are behind us. We will not return to the market.” (March 8, 2008 — Thain in an interview with France’s Le Figaro newspaper)

“We’re very confident that we have the capital base now that we need to go forward in 2008.” (January 18, 2008 — Thain as quoted by the New York Times).

“…These transactions make certain that Merrill is well-capitalized.” (January 15, 2008 — Thain in a statement after selling $6.6 billion of preferred shares to a group that included Japanese and Kuwaiti investors)

“One of my first priorities at Merrill Lynch was to strengthen the firm’s balance sheet, and today we have made great progress towards that by bolstering our capital position through these investments and our announced sale of Merrill Lynch Capital.” (December 24, 2007 — Thain in a statement when Merrill announced a $6.2 billion capital raising)

(Reporting by Martin Howell)

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