How Merrill Spun its Write-Down News

Shares in Merrill Lynch are flat this morning: investors seem unconcerned about the news that the company will take a whopping $15 billion write-down in the fourth quarter.

Last month, after Merrill got a $5.6 billion cash injection from Temasek and Davis, I asked what would happen in the event of an eleven-figure write-down. In the event, it seems, the write-down is going to be even bigger than the most pessimistic December estimates: $15 billion is more than a third of Merrill's market capitalization, and is over 37% of Merrill's book value. No wonder the bank is going to need more capital.

I do think there's some strategic leaking going on here: Merrill doesn't want the market to be surprised at a $15 billion write-down. So first it started hinting to analysts that the fourth-quarter write-downs could be enormous; then, just before the actual announcement, it let the press know just how big the actual number was likely to be. This strategy isn't exactly transparent, but it does seem to have been reasonably effective: Merrill shares remain above the crucial $48 level at which Temasek and Davis are buying in.

But if Merrill knew back in December that it would have to take a huge write-down, it really should have informed its shareholders in a more direct manner. That's not just proper investor relations, it's the law.