Merrill Lynch Writes Off $7.9 Billion in the Credit Crisis

When I wrote about this in an earlier post, I pointed out that the mess is *still* ahead of us.  We’ve just seen the tip of the iceberg and just a bit more below the waterline.  The really, really ugly stuff is still ahead.

While reading about this today, I could not help but notice the words used by the financial reporters describing how $7.9 Billion US Dollars were wiped off the balance sheet at Merrill Lynch.

In one AP article the words used were “writedown”, “bad bets”, “shortfall”, “value of these investments has been difficult to determine” (not at purchase, but now…) and finally, the icing on the cake, “poor risk management”.  Duh.

This leads me to a few questions — When investment houses buy loans that have names like NINJA LOANS, which stands for No Income, No Job, exactly what type of return are they expecting from those types of paper?

In my previous blog, which is getting an upgrade to Wordpress, I pointed this out back in 2006 when I got out of most financial stocks.  Everyone with half a brain knew back that that the speedy train was headed for a very nasty wrack when things like NINJA loans were flying out the window.

While things were going nicely, it looks like a lot. 

That leads to this –where did all the money go?  Well, when you follow at first the money trail, and then down the end path to where things originated, it all ends up at the individual homes that created the paper when they financed the loans.  The end result being that several hundred billion or even a trillion or two of value across the homes of America got wiped out.

So, in the end, “writedown”, “bad bets”, etc, etc. came off the backs of real people, who worked really hard to make things work.  Then a meltdown in the financial industry took the value away.

One of my investment philosophies is that it DOES MATTER what type of products the companies are working with, and over a little time, that will reflect on what happens in their financial reports.

At this time I am sitting on such a “time bomb” in one of the shipping companies that I’ve picked for the NSS Growth Portfolio.  The shipping company is now making money using paper.  Sure their fixed business and assets are making very good money, but on top of that they are using paper instruments to further their profits.  The problem is when those are the things that people focus on and forget about the underling business and the value of it.

It does not take much to get people carried away and think that there is a new paradigm on the horizon. When I hear things like that, I run for the exit  Well, not a run, but more like getting sucked out an airplane at 40,000 feet. Get out!

Sure things like this happen. Otherwise, people will never get back to the real businesses that they need to run.  That’s why an occasional “shake out” is good to remind everyone how things are done.  I am sure that financial text books are getting a few pages added to explain this one away.

The problem is that in the process, a lot of real people with real lives, got “Lynched” and they were not in the Merrill Tower…

Rich Sage
Disclosure: SR.RS does not own any MER shares. And don’t plan on it.