Merrill Lynch & Co., Inc. (NYSE: MER) shares fell sharply today after the troubled investment bank priced its share offering at $22.50. This pricing point suggests that they weren't able to sell shares at the current market price and raises questions about both dilution and the company's ability to maintain its share price. Shares fell sharply before recovering to $23.90 on the news today.

Merrill Lynch told investors yesterday that it would raise $8.5 billion by selling newly issued stock despite the fact that CEO John Thain repeatedly denied that the firm would need to raise more capital. In fact, back in January Thain was quoted as saying, "We're very confident that we have the capital base now that we need to go forward in 2008." Such comments had many investors convinced that such dilution wouldn't occur anymore.

In fact, on April 4th of 2008 he even commented: "In 2007, we lost 8.6 billion dollars after tax, but we raised 12.8 billion dollars in new capital. We raised significantly more capital than we lost. And we did that on purpose so that we could say to the marketplace that we raised more than enough capital. We replaced all the capital we lost. We have plenty of capital going forward, and we don't need to come back into the equity market. The goal is to maintain our current ratings. No more capital raising; I'm sure we have enough capital."

Merrill Lynch needs the capital after unloading more than $30.6 billion in repackaged debt at a fire sale price ealier this month in an attempt to reduce the risk on its balance sheet. Such news only underscores the fact that the financial sector remains exposed to losses that will require more loan loss reserves, more write-offs, and more capital to keep afloat. All of this is bad news for Merrill Lynch and others in the financial sector, except perhaps Goldman Sachs.

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