Thread: Merrill, Wachovia in Danger of Failing: Strategist

Merrill, Wachovia in Danger of Failing: Strategist
Topics:Europe | Subprime Lending | Credit | Stock Market | Banking
Sectors:Financial Services | Banks
Companies:Wachovia Corp | Fannie Mae | Merrill Lynch & Co Inc | Freddie Mac
By CNBC.com | 18 Aug 2008 | 05:30 PM ET
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Merrill Lynch, Wachovia and other financial companies are at risk of failure as the cost of raising capital soars at a time when the banks need to pay settlements over auction rate securities, David Kotok, chairman & chief investment officer from Cumberland Advisors, told CNBC Monday.

"I think the financial problem is half way through the cycle … there's another shoe to drop ahead of us and it could be more severe," Kotok told "Worldwide Exchange." (Watch the video at the left to hear Kotok's views on where oil and the dollar are heading.)

The cash companies need to shore up bad investments, "is up to about $50 billion and will probably top $100 billion before it's over," he added.

"Those firms -- Merrill,
MERRILL LYNCH & CO INC
MER

23.82 -0.92 -3.72%
NYSE
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[MER 23.82 -0.92 (-3.72%) ] Wachovia
WACHOVIA CORP NEW
WB

14.30 -0.66 -4.41%
NYSE
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[WB 14.30 -0.66 (-4.41%) ] and others -- are going to have to raise that cash," he said. "They are either going to have to get it from the Federal Reserve, through some direct or indirect means, which means more leverage, more Fed balance sheet, more regularly oversight or they're going to have to get it in the capital markets."

"The price in the Federal Reserve is about 2 plus percent, in the capital markets it's four times as high," Kotok said. "If they pay the higher price, there is no profitability for them so their franchises are jeopardised. This is a serious developing issue as we cure years of overleveraging."

The amount of cash written off Merrill Lynch and Wachovia's balance sheets since the onset of the credit crisis still far outweighs the amount of cash they have raised, suggesting the need for fresh capital injections.

"Wachovia is a strong and stable company on solid footing," a spokeswoman for the bank said, referring to the company's statement on Friday that it "does not currently expect that the purchase of ARS under the agreement in principle will have a material effect on capital, liquidity or overall financial results."

Merrill Lynch didn't immediately comment.

Fannie Mae
FANNIE MAE
FNM

6.01 -0.14 -2.28%
NYSE
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[FNM 6.01 -0.14 (-2.28%) ] and Freddie Mac
FREDDIE MAC
FRE

4.17 -0.22 -5.01%
NYSE
Quote | Chart | News | Profile
[FRE 4.17 -0.22 (-5.01%) ] are also in jeopardy, Kotok said.

"Were it not for government aid and backing they would have already had to declare bankruptcy. Their portfolios have problems," he said.

"You see one brick at a time in the financial problem area become addressed. Here's Lehman
LEHMAN BROTHERS HLDGS INC
LEH

13.07 -1.96 -13.04%
NYSE
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[LEH 13.07 -1.96 (-13.04%) ] trying to divest real estate holdings in a falling real estate market," he added.
© 2008 CNBC.com

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I've heard the banks are hiding all the true amounts of forclosures for their books to look better. Some people are months behind of their mortages and the banks keep giving them lesser mortage rates. It's too late for these people they have already forclosed. The banks are just putting the true numbers off to not panick investors. I also heard that Washington Mutual is in danger of closing too!!

Wachovia is on the bank list as accepting the Matricula Consular as well.

They are in the process of cutting hours at the local branches around here. I suspect they are doing the same across the board.