Can something be worth less the zero?

I really liked the quote about Merrill Lynch yesterday:

Thain ``is trying to control the mess that he inherited,'' Scott Rothbort, president of Lakeview Asset Management LLC, said in a Bloomberg Television interview. ``I would not rule out at this point their having to write down even more, but you can't write things down beyond zero.''

I beg to differ. You can write ans asset down beyond zero. You buy a gas station, thinking that it is a profit and revenue generating company. Then you find a leaking storage tank. Your business shuts down, the property is now classified by the EPA as a hazardous site any you pay and pay to clean it up. Hence the less than zero valuation.

The same is true for some financial instruments. Let's say you purchased a credit swap derivative. If you bought it for $X, you must think its value is $X+something. You see it become worthless, you write it to zero. But what if the swap goes against you and you cannot hedge effectively due to the markets. You are now exposed to "less than zero" losses and may continue to mount as the underlying security exposes you to increasing losses.

This is a very real possibility so the notion of "you can't write something off below $0" is just no longer true.

We will be discussing exactly that in today's show regarding the great Merrill Lynch Fire Sale of $30B worth of assets at 1/5th their "value".

But did you know that Merrill is financing 75% of the sale? Did you know that a drop of 5% or more in the value exposes Merrill to more risk?

Nothing in the I Bank world is ever quite what it seems. Remember what we said in yesterday's blog, capital is a difficult thing to both create and keep. And, leverage works in both directions.

More on the show today. Join us and call in.

Here is a link to the story:

http://www.bloomberg.com/apps/news?pid=email_en&refer=us&sid=atfHM8sh2xtw