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Another day of carnage in the subprime mortgage sector on Wednesday, and another day of silence from Merrill Lynch. Someone get Jeff Edwards, the investment bank's finance chief, on the phone. It's high time Merrill let us in on how much damage it has incurred from the subprime mess.
Lehman Brothers has thrown in the towel, shutting down its BNC Mortgage unit, and Capital One wrote off GreenPoint Mortgage on Tuesday. But when is the "thundering herd" going to come clean?
After all, Merrill, as did Lehman, bought a subprime mortgage originator (First Franklin Financial, for $1.3 billion) when the market was already showing signs of distress. And, like Lehman, Merrill is losing money on subprime loans hand over fist—$111 million through the first half of this year. Moreover, on Tuesday, when Fitch Ratings placed $19.4 billion of pre-2006 vintage subprime securities "under analysis" (translation: downgrade coming), eight of the deals had Merrill's name on them.
What has Merrill said so far? Well, they're singing a familiar tune: according to Edwards, Merrill's subprime exposure is "limited, contained, and appropriately marked."
It is hard to believe Merrill's not in for a bloodletting. First Franklin relied mostly on mortgage brokers to sell subprime loans. That channel is in pieces, partly due to shoddy deals but also blatant fraud. And, according to Fitch, as of the second quarter, Merrill had the second largest exposure to subprime and jumbo mortgage paper in its inventory of securities, second to Bear Stearns. Who, exactly, is gong to buy that stuff now?
Maybe Merrill is negotiating with a distressed-asset investor to take First Franklin off its hands. Maybe the entire management team is on vacation. Maybe Edwards lost the charger to his Blackberry. I don't have an answer; I'm expecting one soon, though.
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