Singapore's state-owned investment fund is mulling a $5 billion investment in Merrill Lynch & Co., according to a report Friday, potentially providing the biggest U.S. brokerage with badly needed cash amid billions of dollars in credit losses.
The investment bank is said to be in advanced talks with Temasek Holdings about a capital injection, according to a report in The Wall Street Journal. It would become the latest major financial services firm to turn overseas for cash to bail it out of huge losses related to the subprime mortgage crisis.
A spokeswoman for Merrill Lynch declined to comment. Telephone calls to Temasek went unanswered.
Merrill has already taken $7.9 billion of writedowns from bad bets on risky mortgage-backed securities. Analysts have predicted that Merrill's mortgage writedowns may double with another $8 billion or more in the fourth quarter.
Jeff Harte, an analyst with Sandler O'Neill & Partners, estimated in a client note Friday the bank will record $10 billion in additional credit costs in the fourth quarter. His previous estimate was for fourth-quarter writedowns of $3.5 billion.
Analysts polled by Thomson Financial expect Merrill Lynch to lose money in the fourth quarter, and depending on the severity of the writedowns, the bank could post a loss for the year.Merrill's third-quarter writedowns led to a loss of $2.3 billion.
Global banks have written down an estimated $105 billion this year from exposure to mortgage-backed securities. And, there have already been a string of deals involving infusions from state-owned sovereign funds — mostly from Asia and the Middle East — announced in recent months.
Temasek's board has already given preliminary approval for an investment into Merrill, according to the report, which cited unnamed people familiar with the situation. Pricing, timing and regulatory issues remain to be negotiated, the report said.
A deal with Temasek may not happen, the report said, adding that Merrill may be in discussions with other government investment funds besides Temasek.
Government-sponsored investment vehicles in the Middle East and Asia have invested about $25 billion in Wall Street since the mortgage crisis began this summer.
Morgan Stanley on Wednesday announced a $5 billion investment from China's government-controlled investment vehicle to help replenish its capital.
In October, Bear Stearns Cos. agreed to a $1 billion investment from China's government-controlled Citic Securities Co. Citigroup Inc. received a $7.5 billion capital infusion from the investment arm of the Abu Dhabi government last month.
UBS AG last week announced that the Government of Singapore Investment Corp., the city-state's other state investment fund, is investing $9.75 billion for a 9 percent stake in the Swiss banking company.
Analysts said Merrill needed the potential investment.
"We suspect (Merrill's) current capital position is adequate from a regulatory standpoint but, similar to (Bear) and (Morgan Stanley), its position is likely not sufficient from an industry competitive standpoint without a deal," Wachovia Capital Markets analyst Douglas Sipkin said in a note to clients.
Merrill Lynch shares have fallen about 20 percent since it announced on Oct. 24 writedowns on mortgage-backed debt and corporate loans. The company then ousted Chief Executive Stan O'Neal and replaced him with former New York Stock Exchange head John Thain.
The stock climbed 91 cents to $55.41 in afternoon trading Friday.
Thain was expected to act swiftly in restructuring Merrill Lynch in an attempt to better position its balance sheet amid the market turmoil. He's also no stranger to reaching out overseas to put a deal together.
He led NYSE to buy European exchange operator Euronext, and made a significant investment in India's National Stock Exchange. Thain also has struck a cooperative agreement with the Tokyo Stock Exchange in a move analysts viewed as a first step before a broader deal.
Meanwhile, Temasek has a track record of making large investments in financial institutions, and has major holdings in Britain's Standard Chartered PLC and South Korea's Hana Financial Group. The fund was set up in 1974 to manage Singapore's assets, and now controls a portfolio of over $100 billion worth of investments.