The credit market crisis is forcing Wall Street firms to rip up even some of their best-laid plans, the latest example being Merrill Lynch's decision to postpone the building of a hi-tech skyscraper in midtown Manhattan.
The investment bank is understood to have asked instead for an extension of its downtown lease, calculating that it needs to use its money to rebuild its balance sheet rather than build a glitzy new headquarters. Merrill Lynch admitted it lost $7.9bn (£4bn) on ropey sub-prime mortgage investments in just three months last year, and ousted its chief executive Stan O'Neal in November. Its new boss, John Thain, has shelved talks with the real-estate developer Vornado, which had been planning to demolish a hotel opposite Manhattan's Penn railway station and replace it with a Merrill Lynch tower. Those plans were reportedly so far advanced last autumn that they were ready for board approval at Merrill Lynch, but Mr O'Neal's resignation disrupted the timetable.
Mr Thain has decided that Merrill should not now commit millions of dollars upfront to a project that will not come to fruition until at least 2012, even though employees have been complaining about outdated trading floor facilities at the existing headquarters in the World Financial Centre, downtown opposite the World Trade Centre site.
A five-year extension to the existing lease is under discussion, extending Merrill's commitment to downtown Manhattan until 2018, according to people close to the talks. A final decision has still not been made.
Grandiose spending plans are being replaced by hair-shirt policies across Wall Street, as banks and other financial institutions are forced to conserve cash and even seek rescue financing from outside investors. Merrill itself tapped the Singapore government for a $4.4bn investment just before Christmas.
Yesterday, another important credit market player said that it too would be raising emergency funds. The insurance company MBIA, which insures bonds against the risk of default, said it would raise $1bn in new debt financing in order to keep its gold-standard, triple-A credit rating, without which customers would refuse to do business with it. It also slashed its dividend by 60 per cent.
MBIA has guaranteed billions of dollars of bonds backed by US mortgages, including some $8bn of the most risky mortgage derivatives, known as "CDO-squared" derivatives. American homeowners are defaulting on mortgage payments in record numbers and MBIA faces having to pay out much more than it bargained for.
Fitch, the credit rating agency, said the sale of the new debt, which matures in 2033, would "effectively address the existing capital deficiency" and fix potential capital shortfalls at MBIA. The agency threatened to downgrade MBIA's credit rating last month.Reuse content