Citigroup Earnings Better, Merrill Earnings Worse

Merrill's $4.65 billion net loss reported yesterday afternoon was a shock even to the most pessimistic analysts, who had all been caught up in an earnings estimate slashing frenzy for the past couple of weeks.  The investment bank posted a $9.7 billion write-down which was somewhat offset by the $4.43 billion sale of its stake in Bloomberg.  The company's second quarter loss was actually higher than its first quarter loss.  Apparently, the worst was not over for Merrill then.  Is it over now?  Frankly, it is a really bad sign when a company begins to sell its valuable assets while burying its head in the sand on its real problem.  Merrill's remaining CDO holdings fell to $19.9 billion at the end of June from $26.3 billion at the end of March.  Mr. Thain claimed that buyers are offering prices for CDO's that are too low to justify a sale.  What does this statement really mean?  They have these assets marked too high on their balance sheets and will need to take further write-downs.  Unless of course, the CDO market magically reinvigorates and buyers emerge out of the woodwork.  

The interesting thing is that sentiment has improved so much in the past two days that Merrill's bleak earnings report did not dent its stock price much for a very peculiar reason.  Citigroup, in a real shock to the market, reported a mere $2.5 billion loss.  The company only posted $7.2 billion in write-downs on its exposure to bond insurers.  Of course, Citigroup's assets remain at $2.2 trillion.  If I could get my hands on the current copy of the balance sheet, I would consider spending my weekend attempting to determine what future surprises lie buried in the morass of Citi's assets.  But I suppose I'll have to wait another 45 days for the 10-Q like everyone else and join in the current euphoria over a non-catastrophic earnings report.  It will give me some time to figure out how Freddie Mac plans to raise $10 billion in equity when its market cap is only $5.39 billion.