Merrill in Peril?

Last night, Merrill Lynch and Co. agreed to sell more than $30 billion in toxic collaterized debt obligations (CDOs) at 22 cents on the dollar. The move cleanses Merrill off all but $8.8 billion in CDO exposure, most of which is apparently hedge. Merrill has no written down more than $46 billion, and may be close to the end of its write-down cycle. The company also needed to sell $8.5 billion in new common stock - a move resulting in significantly less new capital to the company as much of the stock is being issued as compensation to shareholders who invested privately in December - which is resulting in dilution to current shareholders of about 38%.

John Thain is the only CEO of one of the toxic banks that I would want to have a drink with, and he is the only one who I would buy a used car from. If he says that Merrill's pain is nearly over, then it might be. I still wouldn't buy the stock, however, as I feel that while the company may have cleaned up its balance sheet, Merrill and the industry will not be able to replace the lost revenue from their inability to sell new CDOs.

The reality is that this looks like Merrill has come to its day of reckoning to more of a degree than any other major bank on Wall Street. While I might take Thain at his word, I wouldn't trust any of these other guys as far as I could throw them.

We won't see any end to this bank decline until you see all of the major banks engaged in full reconciliations for the CDOs and other crazy credit products that they got themselves into over the last several years.

Until that happens, stay clear of the banks. They have further to fall.