Is Merrill Lynch (MER) Next?

September 12, 2008 2:09 PM EDT

Shares of Merrill Lynch (NYSE: MER) have continued their volatile trading action today. The stock which opened the session down over 10%, rallied back to break-even by 11AM, only to give back most of those gains again. The stock is currently down a little over 8%.

Following the collapse of Lehman Brothers, (NYSE: LEH) short sellers have pinned Merrill Lynch as the next investment bank that could run into huge trouble. Short sellers profit from a decline in the stock by borrowing stock, selling it in the market, then buying it back later at a lower price and pocketing the difference.

The late morning rise in the shares of Merrill Lynch was related to a table-pounding call from Citigroup. Citigroup said Merrill has over $40 per share of value in a stress scenario. They also said Merrill has ample liquidity.

Shorts point to Merrill Lynch's bloated balance sheet, saying, like Lehman, it will be the company's downfall.

Merrill Lynch, like many investment banks, aggressively grew its balance sheet in what will likely turn out to be the largest credit bubble in history. When the bubble popped, Merrill not only got caught with unsold assets on its books, but assets thought to be safe turned out to be anything but. Merrill's new CEO John Thain has been aggressively selling trouble assets, including the recent sale of $30.6 billion ABS CDOs to an affiliate of Lone Star Funds for pennies on the dollar.

What could separate Merrill Lynch is its strong assets, including its 50% Blackrock (NYSE: BLK) stake, wealth management unit and institutional franchise. Interestingly, today Blackrock passed Merrill Lynch in market cap.

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Stocks Mentioned

Related Entities

• Citi
• Merrill Lynch
• Lehman Brothers
• John A. Thain
• Lone Star Funds

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