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Merrill May Get $5 Billion Cash Infusion From Singapore Investment Company

The Wall Street Journal has broken this story: “Merrill May Get Capital Infusion.” Hhhm. $5 billion seems to be the magic number, since it happens to be the size of the planned investment in Morgan Stanley by a Chinese investment fund. It may be another coincidence, but is also seems brokerage firms are keen to get deals in hand, perhaps before they and others start announcing more writedowns (although UBS and Morgan Stanley have already kicked off the process, albeit for different reasons).

The interesting question is will these investments improve or weaken the perception of investment banks? While markets generally react positively (at least initially) to deals of this sort, such widespread fundraising in unquestionably adverse circumstances says the firms are fundraising in anticipation of further writedowns (although an alert reader pointed out that in Morgan Stanley’s case, the 8-K suggested that the firm had negative $4.1 billion in economic capital, which is a firm-specific risk measurement).

In the case of Merrill, investors expected further losses so the fundraising is likely to be perceived as a positive. But the rush to raise money may well heighten doubts about the sector.

From the Wall Street Journal:

Merrill Lynch & Co., facing the likelihood of billions of dollars in additional mortgage-related write-downs in the fourth quarter, is expected to become the latest financial firm to get a capital infusion from an Asian government investment fund.

Temasek Holdings Pte. Ltd., a Singapore state-owned investment company, is in advanced talks to inject as much as $5 billion into Merrill, a person familiar with the situation said.

The news comes amid analyst predictions that mortgage write-downs at Merrill may double with another $8 billion or more in the fourth quarter — the latest sign that Wall Street isn’t out of the subprime woods yet. Temasek’s board has given preliminary approval to the investment in Merrill, although pricing, timing and regulatory issues remain to be negotiated, the person familiar with the situation said. As such, a deal may still not materialize. It is also possible that Merrill may be in discussions with other government investment funds in addition to Temasek…..

Temasek, which had assets of about $108 billion as of the end of March, is one of the oldest and most prominent of a group of “sovereign wealth” funds that are using cash piled up from exports or oil sales to become a potent new force in global capital markets. Created in 1974 to invest in Singapore, Temasek in recent years has been increasing its investments abroad. It has been particularly active in China, where it has bought stakes in several big government banks and is planning to invest $1 billion in a private equity fund run by star dealmaker Fang Fenglei….

A further $8 billion write-down at Merrill could take its total mortgage hits to $15.9 billion for the second half of 2007….

A new write-down that big on top of a $7.9 billion write-down in the third quarter could also vault Merrill back above rivals UBS, Citigroup and Morgan Stanley for the dubious distinction of having taken the most mortgage-asset losses on Wall Street.

By comparison, UBS has reported and projected a total of $14.2 billion in mortgage losses for the third and fourth quarters. Citigroup has projected total mortgage-asset damage at $10 billion to $13 billion. And Wednesday Morgan Stanley wrote down $9.4 billion for the fourth quarter after a $1 billion third-quarter hit.

Ms. Katzke of Credit Suisse said asset sales or a capital infusion could help Merrill offset the impact of the resulting decline in Merrill’s book-value equity capital. She cited Merrill’s 20% holding in Bloomberg LP, the financial publisher, and Merrill’s 49% stake in BlackRock Inc. as assets that might be sold. Merrill has said it plans to keep the BlackRock stake.

Merrill’s Bloomberg stake could be worth as much as $4 billion, Ms. Katzke said. But the BlackRock stake, currently valued at $12 billion, is subject to a three-year lockup blocking sales or purchases that expires in September 2009, a BlackRock spokesman noted.

In a worst-case scenario, Ms. Katzke said, Merrill could write down as much as $12 billion to $15 billion. She said Mr. Thain faces “some painful housecleaning.” Other analysts project Merrill may write down $3 billion to $11 billion in the fourth quarter….

An $8 billion write-down could cut Merrill’s book value, or assets minus liabilities, to about $30 billion at year end, down from $37.6 billion in June, Ms. Katzke estimated. Merrill must maintain its regulatory capital, which is roughly comparable to book value, at 10% of its total risk-weighted assets, she noted.

Another analyst, David Trone of Fox-Pitt Kelton, estimated Merrill’s fourth-quarter write-down at $8.6 billion. He added that the toll could rise by another $2 billion if Merrill’s hedge agreements with bond insurer ACA Financial Guaranty Corp., which was downgraded to junk-bond status Wednesday, become worthless.

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