Mother Merrill Blows Her Top

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There's good news and bad news for financial stocks.

The good news: Merrill Lynch (NYSE: MER) isn't playing games anymore, deciding to dump more than $30 billion in mortgage-related assets in a move to rid itself of as many sickly holdings as possible.

The bad news: It did so at less than fire-sale prices, and it must now raise billions of dollars in capital because of the sale. That's no good for other financial companies hoping for a rebound anytime soon.

The floodgates open
According to the Wall Street Journal, Merrill agreed to dump more than $30 billion in assets at -- no joke -- $0.22 on the dollar. It had been holding the securities on its books at a higher price, leaving a writedown of at least $5.7 billion on the horizon. As a result of this all-out-surrender strategy, Merrill will sell $8.5 billion in stock, diluting existing shareholders by an agonizing 38%. Yowzas.

Surprisingly, Merrill's stock didn't move too much Tuesday morning; it was even in the green at one point. Like a huge sigh of relief, the stock's subdued reaction is indication that investors couldn't give a hoot about how much capital has to be raised, or how much the losses will eventually total. They just want these CDO shenanigans buried once and for all.

What it means for everyone else
Perhaps Merrill's doomsday debt scenarios are finally finished. Unfortunately, its actions signal that financial markets as a whole are, yes, probably about as bad as the naysayers predicted they'd be.

As Fool contributor Sham Gad noticed last December, when E*Trade (Nasdaq: ETFC) had to dump assets at $0.27 on the dollar, CDOs are extremely hard to price. Assets are worth what someone is willing to pay for them, and Merrill's move sends a clear message to other financial firms: These things are worth diddly-squat.

That could mean plenty more pain, especially for firms like Lehman Brothers (NYSE: LEH), Citigroup (NYSE: C), and UBS (NYSE: UBS), which continue to run around in circles writing down assets and raising capital to cover the losses of their love affair with CDOs.

The bottom line
You can look at this situation two ways: Either Merrill is a big scaredy-cat, dumping assets for much less than they're worth, or Merrill is the smart one, realizing that the true value of these assets is a pittance of what others are holding out for.

With real estate prices in the gutter, interest rates threatening to move higher, and an economic upturn nowhere in view, I'm sticking with the latter.

For related Foolishness:

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