These Lips Are Not For Reading

"Read my lips," said Republican presidential nominee George H. W. Bush 20 years ago, "no new taxes." The man got himself elected largely on that pledge, then was dismissed by the electorate four years later after, you guessed it, raising taxes. It was an infamous, though hardly unprecedented, example of saying one thing and doing another. Happens all the time in American politics.

And also in American finance. Two weeks ago Merrill Lynch's Chief Executive Officer, John Thain, reassured investors in Tokyo that his company had no plans to raise further capital, that the $12 billion already obtained from sovereign wealth funds would suffice. At that moment Merrill's Chief Financial Officer, Nelson Chai, squirmed in his seat. Chai knew the numbers, which have no lips and thus do not lie. "I wish he didn’t say that," Chai said later of Thain's remark.

Chai's caution was understandable in light of last Thursday's earnings update (see my April 18 post). Despite the reported losses and writedowns, Thain insisted that the firm is "well-capitalized" and that "we do not have any plans to raise any additional common equity, and Nelson actually agrees with that"--at which point Chai squirmed again. During the Q & A segment of the conference call, a Citigroup analyst pressed Thain on the possible need for additional capital. No problem, said Thain, who pointed out that the $12 billion already raised exceeded losses in 2007 by $4 billion. "That capital, that excess capital, was intended to reassure the market that we didn't have to come back into the equity markets and it'd give us the capital base to go forward into 2008. And that continues to be the case."

Given Thain's hope for restored profitability in 2008, Merrill's stock was up on Thursday and Friday. It retreated this morning, however, after the company's announcement of a preferred-stock offering at 8 5/8%. Oops, so much for Thain's reassurances. One wonders if his loose lips in recent days might provoke more shareholder suits. Meanwhile, bean-counter Chai continues to fret over Merrill's balance sheet and the $44 billion of debt maturities coming due in 2008. "We obviously continue to roll commercial paper and repo [repurchase agreements]," said Chai during the conference call.

How long can the juggling continue? Merrill is lunch, in my opinion.

[update, April 24:]
Merrill Lynch announced today that it will continue to pay out a quarterly dividend of 35 cents a share to holders of common stock. No matter that it is rolling over short-term debt at 6% and offering preferred stock at almost 9%. The dividend, which makes no sense from a business standpoint, is obviously meant to buy investor confidence.

[update, May 6:]
Minyanville's Bennet Sedacca has an updated scorecard on the need for new capital and the prices being paid by troubled Wall Street firms:

They just keep coming and coming and coming.
Legg Mason, Fannie Mae, Freddie Mac, Fifth Third, Citigroup. I'm hearing JPMorgan too.
Insurance companies are gobbling up this paper, but at some point they'll say 'no mas'.
What seemed 'cheap' at 7% is now getting done at 9%.
They're on their way to 12%. Or until companies just can't justify paying those yields and start cutting dividends and selling common stock.
As they should.