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Merrill in hunt for more capital as losses set to hit US$15b

It’s wooing investors in US, Asia, Mid-East to shore up finances

(NEW YORK) Merrill Lynch is expected to suffer US$15 billion in losses stemming from soured mortgage investments, almost double its original estimate, prompting the firm to raise additional capital from an outside investor.

The largest US brokerage firm is expected to disclose the huge writedown when it reports earnings next week, according to people who have been briefed on its plans. The loss far exceeds the US$12 billion hit that many Wall Street analysts had forecast.

To shore up its deteriorating finances, Merrill is now in discussions with investors in the United States, Asia and the Middle East, including American private equity firms, to raise about US$4 billion in the coming days, these people said.

The developments underscore the rising toll that the mortgage crisis is taking on many once-proud Wall Street banks. In recent months, Merrill and several other firms have grabbed financial lifelines from wealthy foreign governments. Further investments by so-called sovereign wealth funds could prompt scrutiny by Congress.

The latest moves at Merrill come as John A Thain, who became the company’s chairman and chief executive in December, struggles to bolster the firm’s capital, burnish its reputation and avoid the toxic internal battles that have hurt the firm in the past.

Mr Thain, who won plaudits as head of the New York Stock Exchange, has wasted little time. After he took over in December, Merrill promptly sold a US$5.6 billion stake to Singapore’s Temasek Holdings, and Davis Selected Advisers, a money management firm based in Tucson, Arizona.

During a meeting in December in London, Mr Thain told anxious employees that Merrill expected further losses after an US$8.4 billion writedown in the third quarter. He also said that the firm would require additional capital.

He said that the fourth quarter would be a ‘very bad quarter’, those attending recalled.

Mr Thain has made clear that Merrill would not sell its 49 per cent stake in BlackRock, the global money management firm. But he has said that the firm is considering selling non-core assets like its stake in Bloomberg, the financial news and information company.

In a research report, Brad Hintz, a securities analyst at Sanford C Bernstein & Co, said that that stake was worth about US$4 billion.

Mr Thain also said at the London meeting that Merrill’s management style needed to change. Recalling his days as a co-president of Goldman Sachs, Mr Thain said that he wanted employees to build consensus.

Among other things, that means Merrill will now pay fewer bonuses based on individual performance and instead focus on the performance of a team. Many employees received bonuses this week that included a greater portion of stock than in the past.

Merrill is hardly alone in seeking capital from overseas. US financial institutions have raised more than US$29 billion from foreign governments and their related investment entities, according to market research firm Dealogic.

 

Source: NYT (Business Times 12 Jan 08)

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