Investment banks say capital is still available

Feb.06, 2008 in Market Outlook

Merrill, Lehman give update on exposure to bond insurers

By Alistair Barr, Riley McDermid & John Spence, MarketWatch

Last Update: 7:25 PM ET Feb 6, 2008

SAN FRANCISCO (MarketWatch) - Leading investment banks said on Wednesday that
capital is still available, despite a lingering global credit crisis.

Merrill Lynch & Co. (MER) Chief Operating Officer Greg Fleming said the firm has
plugged gaps left in its capital through recent investments from sovereign wealth
funds. However, Merrill could have raised more money due to significant demand,
and had to push some investors away, he said during a presentation to investors
and analysts on Wednesday.

Goldman Sachs (GS) Chief Financial Officer David Viniar said Wednesday that there
is plenty of capital and liquidity in the markets, but the problem is firms are
willing to use the former, but not the latter.

“They’re willing to use capital,” Viniar said, citing recent huge investments in
several firms by private-equity groups, hedge funds, and sovereign funds.

Lehman Brothers (LEH) Chief Financial Officer Erin Callan said the investment
bank has been approached by outside investors interested in taking a stake. But
Lehman doesn’t need the cash and didn’t want to dilute current shareholders, she
added, during a presentation.

The mortgage crisis has hit some investment banks hard. Merrill and Citigroup
Inc. (C) have written down the value of mortgage-related securities known as
collateralized debt obligations (CDOs) by billions of dollars in recent months.
But the firms have been bolstered by big investments from sovereign wealth funds
in the Middle East and Asia.

Now a new concern is hanging over some firms. Bond insurers, which helped some
banks hedge mortgage-related exposures, are in danger of losing their AAA
ratings. If that happens, banks may have to write down the value of some assets
even more.

Merrill is most at risk for having its credit ratings cut due to its problems
with bond insurers and CDOs, ratings agency Standard & Poor’s said on a
conference call Wednesday.

S&P analyst Scott Sprinzen said Merrill’s current ratings, which depend heavily
on besieged bond insurers to hedge risk in its CDOs, have only a “limited
tolerance” for further losses.

Merrill’s Fleming said on Wednesday that the firm has about $3.5 billion of
exposure to bond insurers if the companies were to go bankrupt.

Lehman’s Callan said the firm has less than $1 billion of exposure to bond
insurers.

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