Yes. That is $8 Billion with a capital B. That’s a very large chunk of change. To put it in perspective, Merrill Lynch’s total market cap (the value of the business) is $53.9 Billion. $8 Billion is nearly 15% of the company’s total market cap. Wow. This is simply a huge figure and shows how poorly the company understood the mortgage backed security (MBS) and collateralized debt obligation (CDO) assets that they had on their books. They did not understand the basic risk that Ponder This… has been explaining in a common sense manner for nearly three years. These very well paid professionals had zero clue!

Click here for the Marketwatch article.

Click here for the August 2005 issue of Ponder This… which highlighted the risk of repackaged MBS products to the housing market (see page 9 of the PDF, the article is entitled “Fannie and Freddie”).

The simple fact is that people thought repackaging risk was a panacea that eliminated it. The fact of the matter is that this line of reasoning is insane and really helped lead to the huge credit bubble (think “liar loans” or “negative amortization” mortgages) that we are now witnessing begin to deflate.

Be on the look out for further write downs in the coming years as these asset values are further exposed as unrealistic and generally fraudulent.

“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.” - Citigroup CEO Chuck Prince July 2007

Filed under: Social Mood, Economics