Making Merry at Merrill - The Little Guy Can't Catch a Break

Merrill Lynch is selling a big slice of its toxic mortgage asset-backed securities and issuing new stock to raise $8.5 billion of fresh capital.

The world's largest brokerage, struggling to right itself as the credit crisis continues, said it will issue more than 200 million new common shares as part of the deal. Merrill said it will write-down $5.7 billion because of additional losses on the sale of mortgage securities and hedging contracts.

The biggest benefactor in the deal is Temasek Holdings, the Singapore sovereign wealth fund that is already one of Merrill's biggest investors. The firm agreed to buy $3.4 billion worth of shares at a yet-to-be determined price, as long as Merrill pays Temasek $2.5 billion in cash.

In addition, Merrill's management plans to buy 750,000 shares, no doubt at a huge discount too.

Merrill said it will sell a large portion of asset-backed securities and terminate hedges linked to bond insurers. So far this year, Merrill has lost and written down $40 billion from failed investments.

Lone Star Funds, a Dallas-based distressed-debt fund will acquire asset-backed securities with a nominal value of $30.6 billion for $6.7 billion. That's 22 cents on the dollar. Even better, Merrill is financing the purchase (Seller financing!) and is taking full recourse (meaning if Lone Star can't make a profit Merrill takes the deal back!) That's a real sweet deal.

The real reason for this maneuvering is to cut Merrill's accounting exposure by $11.1 billion from its level on June 27, leaving $8.8 billion of these securities on its books. More of Wall Street's creative accounting at work.

Here's my ethical and moral question.

Would it not be a better for America if Merrill could have offered every beleaguered home owner that has a mortgage covered in these securities a restructure down to the 22% level? For example, a $200,000 mortgage could have been reduced to $44,000. Assuming an average securitized mortgage of $200,000, this means that there were approximately 15,500 homeowners that Merrill could have rescued. Do you think any homeowner would have turned this gift down? Wouldn't this have been a better deal for more Americans? And Merrill could have done this without any recourse exposure.

Once again, the little guy can't catch a break.

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