Thank you Taxpayer. Sincerely, Merrill Shareholders
In the end, investors and financial institutions could face as much as $2 trillion of losses from bad U.S. loans and bonds, far more than anybody thought even a few months ago. A sustained recovery for markets and the economy is unlikely until the hole is filled. Bank stocks are falling sharply as investors come to grips with the worsening outlook for loan losses.
Analysts at Goldman Sachs were the latest to raise estimates of potential U.S. loan losses. In a report released late Tuesday night, Goldman economists estimated that losses from delinquent U.S. residential mortgages alone would hit $1.1 trillion as home prices sink, up from an earlier estimate of $780 billion.
Add in losses from commercial real estate, credit cards, auto debt and business debt, and Goldman’s loan-loss estimate hits $2.1 trillion. Only half of those losses have yet been recognized. Many will be borne by investors and banks overseas. The estimate doesn’t count losses that U.S. institutions will take on bad overseas loans that they hold.
18 months ago, $200B was the expected loss number when people first noticed that we might possibly have credit losses.
In the aftermath of Bank of America’s acquisition of Merrill — valued at $50 billion when it was announced and worth $19.36 billion when it closed — its chief executive, Kenneth D. Lewis, was viewed as a savior of the financial-services industry, having rescued both Merrill and Countrywide without government assistance. Mr. Lewis had also argued that Bank of America didn’t need the first round of federal rescue funds that the Treasury offered last fall.
At the time, it was clear that Thain got the “Great Seller” award of the year by getting Lewis to pay tens of billions for a firm that would probably otherwise be driven to a Bear/Lehman style event within days or weeks. As with Countrywide, Lewis was early and high.
Discussions over these funds began in mid-December when Bank of America approached the Treasury Department. The bank, already the recipient of $25 billion in committed federal rescue funds, said that it was unlikely to complete its Jan. 1 purchase of the ailing Wall Street securities firm because of Merrill’s larger-than-expected losses in the fourth quarter, according to a person familiar with the talks.
Treasury, concerned the deal’s failure could affect the stability of U.S. financial markets, agreed to work with the Charlotte, N.C., lender on the “formulation of a plan” that includes new capital from the $700 billion Troubled Asset Relief Program, according to the person familiar with the talks.
But…who is going to end up paying for Merrill driving themselves into the ground and Thain’s eagerness?
Not the shareholders, not the creditors, but you dear taxpayer.