Why Merrill's Falling

I liked the Merrill Lynch earnings call this morning, and when I posted my take on it just after the markets opened, it seemed as though the bank's stock would avoid much in the way of punishment for its enormous losses. But it was not to be. Merrill stock has been sliding all day, and just now dipped below the $50 level - that's a drop of over 9.3% on the day.

What's going on? Well, as Murray pointed out in the comments to the earlier blog entry, Merrill's book value has plunged - it ended the fourth quarter at just $29.37, which means the bank is now trading on a price-to-book ratio of 1.7. That puts Merrill at a significant premium to both Lehman and Morgan Stanley, for no obviously good reason.

What's more, the rest of Wall Street is dropping today as well: Goldman's down 3.5%, Morgan Stanley's down 4.6%, Lehman's off 6.1%, Bear's off 6.4%. So while Merrill is the worst performer today, much of the losses over the course of the session can reasonably be ascribed to a general move out of the investment banks.

And that move is clearly, I think, related to the implosion of MBIA - down 33% to less than $9 a share, compared to a 52-week high of $76 - and Ambac, which is down 54% to less than $6 per share, compared to its 52-week high of $96. None of Wall Street has yet to take the kind of write-downs which will be necesssary if MBIA and Ambac guarantees become worthless: Merrill alone has another $3.5 billion in exposure to AAA-rated insurers.

"We should all be helping and hoping that MBIA and the others get recapitalized," Thain told employees Thursday - but hope isn't much of a strategy unless your name is Barack Obama. Thain can continue to hope; his shareholders will continue to worry.