Merrill Sells $31 Billion In Mortgage Securities For 22 Cents On The Dollar, To Issue $8.5 Billion In Stock

The big story today is Merrill Lynch’s (MER) announcement that it will sell $30.6 billion in face value mortgage backed securities to Lone Star Funds for a purchase price of $6.7 billion -22 cents on the dollar.  Merrill had already marked down these securities significantly, carrying them at $11.1 billion, or 36 cents on the dollar.  So this sale will result in another writedown of $4.4 billion – the difference between what they were carrying the securities at and what they are selling them for ($11.1 – $6.7 = $4.4).

They also announced that they will be selling $8.5 billion in stock to further strengthen their balance sheet.  Because of reset protection in a previous offering, Merrill will have to compensate Temasek Holdings $2.5 billion.  So it looks like this will raise an additional $6 billion in cash.

Analysts have been pretty positive about these moves from Merrill.

Along with today’s announcement, they included an updated table of book value to reflect today’s actions.  It puts Merrill’s book value at $22 a share.

Interestingly, Merrill’s shares traded down to $22 a share this morning where they found support and have since rallied to around $25.  171 million or about 17% of Merrill’s 985 million outstanding shares have traded hands today.  That’s by far the biggest volume day of the last 5 years – no other day has even surpassed 100 million shares – and we still have 2 hours to go.  A look at the charts suggests a bottom of some significance is in place for Merrill (MER 3 Month Chart).

Disclosure: Top Gun has no position in Merrill Lynch (MER) shares.