Deutsche Bank’s Michael Mayo: Citi May Write Off Another $8 Billion

When Merrill announced its surprise writedown of super senior CDOs yesterday, all eyes turned to Citigroup, another large holder. Analysts started sharpening their pencils and have offered updated estimates. From Bloomberg:

Citigroup Inc. probably will write down the value of collateralized debt obligations by $8 billion in the third quarter based on Merrill Lynch & Co.’s repricing of its CDOs, said Deutsche Bank AG analyst Mike Mayo.

Merrill sold its holdings for 22 cents on the dollar, while Citigroup currently values the securities at 53 cents, Mayo wrote in a report to clients today….

“The good news is that that the actual sales can give confidence that Merrill is finally selling assets rather than merely marking them to market,” Mayo said.

At Citigroup, the additional writedowns mean the bank probably will report a third-quarter loss of 59 cents a share and a full-year loss of 80 cents, said Mayo, who has a “hold” rating on the stock. He previously estimated the New York-based bank, the biggest in the U.S. by assets, would report a loss of 66 cents in 2008.

Mayo is estimating that Merrill, the third-largest U.S. securities firm, will report a full-year loss of $10.95 a share, compared with his earlier prediction of a $5.80 loss. Oppenheimer & Co. analyst Meredith Whitney estimates the company will report a loss of $10.50 in 2008.

UBS AG analyst Glenn Schorr estimates Merrill will report a full-year loss of $11.36 a share because of “significant dilution” from the plan to raise capital by selling about $8.5 billion of stock. Schorr has a “neutral” rating on Merrill.

“While we don’t think Merrill’s announcement necessarily implies a 40 percent writedown ($7.2 billion) for Citi, directionally we think investors should expect further incremental writedowns in coming quarters,” Schorr wrote in his report to clients today.

Um, Mayo calls the Merrill transaction “actual sales” when it was in fact 75% financed. Oh, don’t look at the man behind the curtain either…..

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  1. Anonymous

    Apologies in advance for O.T. 2 AIG directors resign
    immediately within past ten days. Stock looks particularly sick. Any thoughts?

  2. Anonymous

    MER also is liable for all losses below the 75% financing level on the assets it ‘sold.’ So sure, they sold assets. Then they sold a put struck at 75% of the selling price. And then they paid the Piper for the ‘ratchet’ provision. Classy.

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