Merrill Lynch, Wachovia at Risk of Failure

August 20th, 2008

Via: CNBC:

Merrill Lynch, Wachovia and other financial companies are at risk of failure as the cost of raising capital soars at a time when the banks need to pay settlements over auction rate securities, David Kotok, chairman & chief investment officer from Cumberland Advisors, told CNBC Monday.

“Those firms — Merrill, Wachovia and others — are going to have to raise that cash,” he said. “They are either going to have to get it from the Federal Reserve, through some direct or indirect means, which means more leverage, more Fed balance sheet, more regularly oversight or they’re going to have to get it in the capital markets.”

“The price in the Federal Reserve is about 2 plus percent, in the capital markets it’s four times as high,” Kotok said. “If they pay the higher price, there is no profitability for them so their franchises are jeopardised. This is a serious developing issue as we cure years of overleveraging.”

The amount of cash written off Merrill Lynch and Wachovia’s balance sheets since the onset of the credit crisis still far outweighs the amount of cash they have raised, suggesting the need for fresh capital injections.

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