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August 13, 2008 > Purging investments might help financials move on

Purging investments might help financials move on

By Joe Bel Bruno

NEW YORK (AP), Aug 08 _ Investors' attempts to get Wall Street on a more secure track have been something of an exercise in futility despite big advances like Friday's triple-digit gain in the Dow industrials. But some analysts feel the battered financial sector might actually be able to help the market finally make that break _ by following Merrill Lynch & Co.'s example and clearing their books of risky investments.

The billions of dollars in losses that financial companies have suffered due to failed mortgage investments have been a primary reason for the stock market's plunge over the past year. And so a dramatic, and potentially expensive, purging of the financials' books might finally give Wall Street the conviction it has been lacking to charge higher.

``They could lay the groundwork for the recovery,'' said Quincy Krosby, chief investment strategist at The Hartford. ``You can't move on until you start cleaning this up. The share prices are affected, the mood of the market is affected, and cleansing the banks will begin the healing process.''

Major investment banks had been trying to manage their way out of the financial crisis: selling off the riskiest assets on their books, while keeping others in hope the mortgage-backed market would rebound. Then Merrill Lynch finally made the decision to jettison most of its troubled mortgage portfolio to distressed-debt buyer Lone Star Funds.

John Thain, Merrill's chief executive, sold $30 billion worth of the troubled securities for about $7 billion _ or about 22 cents on the dollar. He also raised $8.5 billion of new capital in the biggest secondary offering in U.S. history.

Many analysts believe other major banks must make similar moves including Citigroup Inc. and Lehman Brothers Holdings Inc. as well as retail banks like Washington Mutual Inc. and Wachovia Corp.

The move by Merrill pressures other financial institutions to make public their own plans.

``I think they are all looking to do something soon,'' said Jeffrey Kleintop, chief market strategist at Boston-based LPL Financial Services. ``When the market expects something to happen, the worst thing you can do is drag it out _ that's the real enemy they face right now.''

Citi could be facing $7 billion to $16 billion in additional write-downs if it were to make the same sales that Merrill Lynch did, according to analysts. They said it would cost $1.5 billion for Morgan Stanley, $600 million for Lehman, and $300 million for Goldman Sachs Group Inc.

Dealing with troublesome securities is likely to help companies from a public relations standpoint as well.

This past week, Citigroup took steps to repair its image by buying back from investors auction-rate securities _ bond-like investments that brokers pitched as safe, but that lost significant value due to the market dislocation. Though Citi was forced to take these steps by regulators, it led others like Merrill Lynch and Switzerland's UBS AG to follow.

``They just want to put these problems behind them, and that's another example,'' Crosby said. The banks aren't expected to take a significant loss from buying back the auction-rate securities, which have mostly held on to their value compared to the mortgage-backed securities.

She believes the entire market will begin to benefit once companies like Citi and Lehman Brothers reveal their strategies. Lehman Brothers is being closely watched because it is the smallest of the big Wall Street banks; there are some fears on the Street that it could suffer the same fate as Bear Stearns Cos., which came close to collapse before it was taken over by JPMorgan Chase & Co.

In recent weeks, there has been speculation that CEO Richard Fuld is putting together a plan similar to Merrill Lynch's. At the end of the second quarter, Lehman held about $36 billion of commercial mortgages and other risky securities on its balance sheet. Fuld is also expected to raise more capital.

``My sense is that Lehman feels a need to take action now to stop, for once and, hopefully, for all, the constant stories and rumors swirling around the company,'' said Richard X. Bove, an analyst with Ladenburg Thalmann & Co.

That kind of action could lift the market's confidence in the financials and go a long way toward helping Wall Street feel more comfortable that a bottom, even if only for the financials, was achieved.

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