Sunday, October 28, 2007
Uneasy lies the head that wears a crown: E. Stanley O' Neal,Merr-ILL?
To forecast a $5.5 billion write off is careless, to then revise it up a couple of weeks later by another $2.4 billion is just plain fishy.I hate to say I told you so but in my previous blog I intimated that all was not well at Merrill Lynch.No one really knows the real state of it's balance sheet,least of all the CFO or Stan, and I certainly wouldn't trust the Auditors.Oh dear.Funny thing is if you look in the 2006 Annual Report from page 51 onwards there is all sorts of drivel about the firm's Risk Management policies, the ROC, the role of the Executive Committee.Yada yada yada.Either this was all bullshit ( the smell is somewhat familiar) or just delusional lies.Either way the only losers are the shareholders.Still the drama that has ensued livened up a traditionally very uneventful fourth Quarter.
Stan is one of my heroes though. After succeeding Komansky to the ML throne in 2002, he proceeded to fire everyone he disliked, anyone who disagreed with him or who could be potential rival. This is called the Caligula School of Management. When you’re left with just yes men and Board members who have no interest in upsetting you and just pocketing their own compensation, is it any wonder no one has bothered telling you that you maybe taking on a little excessive risk. So really Stan has only himself to blame for his current predicament.
If I had to describe Stan here are the adjectives I would use: Calm,Ruthless, logical, Manipulative, Charming, Intelligent, Aloof. These qualities are not unique to him. They are also exhibited to some degree or another on the rest Board of Merrill and lots of other Wall Street Firms. Just one problem though, those of you who are familiar with abnormal psychology may also notice that these characteristics are all listed in the current Statistical Manual of Mental Disorders (DSM-IV-TR Fourth Edition 1994) as the classic signs of a sociopath.
With losses and write downs probably continuing well into the next quarter and beyond, and no potential floor on the downside given the opacity of on and off balance sheet exposure Merrill could well get taken over. Current valuations are still too high for it to be an attractive proposition for a predator. Someone might fancy it's retail arm which always chugs along making good cash flow. I would place current book value around $10 -15. How I got to this valuation.I'm not telling you -it's a secret, just like the way they calculated the latest write down. I think the formula is : Back of Envelope+Pen+whatever sounds about right.Analysts are livid after last week's conference call.This is very disingenuous on their part.Unless they were all asleep for the last two years, if you actually looked at the company's business mix and probed around a bit, the losses aren't a surprise.
Any more write downs and it may be the first of the major investment banks to go to the wall. Personally I wouldn't mind seeing it go under, I flogged all my holdings at $78 early last year why do I care. Just for entertainment value it would be nice to see a bit of blood on the street.A shake out is always good.I liked the 80s,I'm hoping this could be the Drexel Burnham of the new millennium.
How can the Board save ML? Well they could divest ML's interest in Blackrock. As noted in a blog at the time of the acquisition this was a very silly deal for Merrill.Still they know best right.
No doubt about it though, Stan is in a tricky position. Now after an apparent unauthorised overture to Wachovia late last week, the Board have turned against him. They are biting the hand that feeds them. Like most sociopaths they have no empathy or remorse.
So Stan must be thinking how he can save himself.Well he could replace the Chief Risk Officer with horse or maybe just quit.
RB
Stan is one of my heroes though. After succeeding Komansky to the ML throne in 2002, he proceeded to fire everyone he disliked, anyone who disagreed with him or who could be potential rival. This is called the Caligula School of Management. When you’re left with just yes men and Board members who have no interest in upsetting you and just pocketing their own compensation, is it any wonder no one has bothered telling you that you maybe taking on a little excessive risk. So really Stan has only himself to blame for his current predicament.
If I had to describe Stan here are the adjectives I would use: Calm,Ruthless, logical, Manipulative, Charming, Intelligent, Aloof. These qualities are not unique to him. They are also exhibited to some degree or another on the rest Board of Merrill and lots of other Wall Street Firms. Just one problem though, those of you who are familiar with abnormal psychology may also notice that these characteristics are all listed in the current Statistical Manual of Mental Disorders (DSM-IV-TR Fourth Edition 1994) as the classic signs of a sociopath.
With losses and write downs probably continuing well into the next quarter and beyond, and no potential floor on the downside given the opacity of on and off balance sheet exposure Merrill could well get taken over. Current valuations are still too high for it to be an attractive proposition for a predator. Someone might fancy it's retail arm which always chugs along making good cash flow. I would place current book value around $10 -15. How I got to this valuation.I'm not telling you -it's a secret, just like the way they calculated the latest write down. I think the formula is : Back of Envelope+Pen+whatever sounds about right.Analysts are livid after last week's conference call.This is very disingenuous on their part.Unless they were all asleep for the last two years, if you actually looked at the company's business mix and probed around a bit, the losses aren't a surprise.
Any more write downs and it may be the first of the major investment banks to go to the wall. Personally I wouldn't mind seeing it go under, I flogged all my holdings at $78 early last year why do I care. Just for entertainment value it would be nice to see a bit of blood on the street.A shake out is always good.I liked the 80s,I'm hoping this could be the Drexel Burnham of the new millennium.
How can the Board save ML? Well they could divest ML's interest in Blackrock. As noted in a blog at the time of the acquisition this was a very silly deal for Merrill.Still they know best right.
No doubt about it though, Stan is in a tricky position. Now after an apparent unauthorised overture to Wachovia late last week, the Board have turned against him. They are biting the hand that feeds them. Like most sociopaths they have no empathy or remorse.
So Stan must be thinking how he can save himself.Well he could replace the Chief Risk Officer with horse or maybe just quit.
RB
Monday, October 08, 2007
Whither Blog?
One of the few things money can't buy is good weather.Well that's not strictly true. I have written nothing since February because of the inclement conditions in the UK this year. I also lost all interest in finance - again. Bad weather plus boring subject matter=no blog entries. I have also scrapped the cityboy consults service. Good idea, but I genuinely can't be bothered. I've spent as much time as I practicably could on holiday this year, including a most enjoyable month at Sandy Lane, my current favourite hotel outside Europe. The ever declining dollar makes it almost a bargain.
Now holidays are over, for a change I'm in a good mood. The fourth quarter is here already, but what did l miss in the last eight months. Looking back, only a couple of things nothing of real note. In an earlier entry I mentioned Jade Goody as a possible candidate for Governor of the Bank of England. I take it all back, policy should be decided using text voting - similar to pop idol or stars in their eyes. This has the double benefit of raising revenue for our new Darling and allowing Joe public to become much more engaged with setting things like interest rate policy. If you think rates should be cut by 25 basis points text CUT to 0870 123 456 or alternatively call the MPC to register your vote. Members will be there to take your call once a month. A small percentage of all call profits will go towards a charitable foundation, so current and future members can be taught basic practical economic theory and have access to learning facilities which allow them to think independently and maybe one day be released back into the financial community to sit on the board of a bank as a non-executive director or similar. All calls cost £1+ standard network charge.You get the idea.
The buffoons at the Bank of England have only themselves to blame for the current liquidity problems and consequent public mistrust of their handling of the Northern Rock Affair. Some commentators have suggested with the benefit of hindsight bias that oh yes it was a terrible business model anyway, they knew all along it would implode, it was a mismanaged company. Truth is the business model was a product of it's age and due to abnormal credit conditions it collapsed. Lending long and borrowing short makes perfect economic sense if short borrowing is cheap and plentiful.Back to the abnormal credit environment. I wonder how that happened? Well amid the buffoonery at the MPC quarter on quarter for a long time they forgot to act independently and kept leaving rates on hold, even while real inflation was creeping up. I'm not talking about the fudged rate from the even more incompetent ONS which all the government statisticians seem to have left.
The problem with the MPC of course is that they are all academic types-so the real world of rising oil, and agricultural commodities and house prices doesn't really impinge on their thinking. How do you manage a real economy on theoretical data. You can't- one has to be realistic and consider the real economy. King should have resigned when he had to write that letter to the then Chancellor. Even after mismanaging the economy so long through cowardly lack of decisiveness he is still in a job. So that's where my tax money goes to keeping these public sector geniuses in jobs they can't do and their final salary pensions. No thanks.
Lest you think l am picking on Mr King, Bernanke and the Fed are worse. A small taste of liquidity problems -and off he goes propping up the US economy, injecting liquidity (I think that's a euphemism for just printing more dollars), panic cutting rates by 50 basis points. All too late. The problem again is that he is an academic economist, rather like Mr King. Mr Bernanke used to teach at Princeton. He taught the cream of America. Rich and thick.
Was Northern Rock mismanaged. Answer:No. The businesses model was so simple and of the moment.You couldn't mismanage it.The quality of it's loan book seems extremely good still and default rates lower than market peers.No real impairment discounts need to be applied but prospective buyers want it cheap.The quality of non-executive directors also seems very high.Nicola Pease is not a fool, her husband is Crispin Odey and she can also claim consanguinity with John Varley of Barclays. Barclays, alas, was another victim of the credit crunch,what with funding all those off balance sheet conduits.It don't come cheap.In the end,it sounds like a strange proposition but the banks have been the biggest victims of poor central bankers in the UK and US.They will be the ones suffering job losses this Christmas.It doesn't lead to Dickensian poverty for the bankers,but the ghost of bonuses past will loom ever present.If you want to see what a great central banker looks like,try Jean-Claude Trichet.
The fourth quarter also means the results season is upon on us.The sub prime fallout started with it's first casualty Bear Stearns.For a one trick fixed income house gone mad on financial steroids,Bear stock had performed extremely well,then collapsed.It will come back-so hopes Joe Lewis who took a big position in the stock post collapse.If it works he will be even richer than he is now.I am reminded of a similar play on Citigroup by Prince Al Waleed bin Talal in the early 90s.It could work.Lehman's numbers were respectable.
So what went wrong at Merrill? 50 cents per share loss,that's no good.What happened to Stan's famous cost discipline / control environment? Well he got greedy see,sadly Mr Fakahany though he talks a good game on analysts conferences got lax.The real value add member of senior management in challenging operating environments for investment banks is the CFO.Ahmass alas was not there valuing the add.The last time Merrill made a loss on this scale was after the tech boom/bust.They subsequently went on to shed about 25% of their workforce globally.Merrill is the yo-yo dieter of the Investment Banking world.The payroll is once again bulging through four years of gluttonous hiring. Stan will start the blood letting soon.Expect CVs from ex-Merrill employees at a headhunter near you,very soon.He is a kind soul,so the axe should fall in November and take you right through Christmas.
Goldman deserves a paragraph to itself in this blog.Of course you are all aware US accounting standards allow more than a handsome degree of leeway in the method of attributing and calculating write-downs on illiquid and obscure instruments.Especially notional mark to market for complex products where due to lets say,a temporary market abnormalities and price dislocations you can't actually mark to market.It's a tricky area.I call it fudging.It's all legal though.I'm sure the auditors for the major investment banks know what I'm talking about.Been tempted to qualify any of the accounts of some of the investment banking clients,just a teeny weeny bit? Are you sure,you can tell me.I won't tell anyone.If you're a Big 3 audit partner please be sure to keep your professional indemnity insurance up to date won't you.I won't even charge you for that advice.I'm nice me.Where were we,Goldman.Everybody gets fucked,but Goldman is up 67% on the quarter.Whether it's due to great risk management or miraculous financial legerdemain,I have no idea,but most of seems down to David Viniar.As CFOs go in these awful organisations you can but admire his decision making skills.After all he has final say in allocation of capital risk.I have no idea what Lloyd Blankfein does (though he does have a striking resemblance to Jeff Bezos of Amazon.Are they the one and the same.I have never seen them together, so suspicions were aroused).Mr Viniar is my favourite CFO by a long way,for obvious reasons.
My other favourite CFO is Jonathan Asquith of Schroders for entirely different reasons. It's ok Jonathan your parting is on the correct side of your head, it's just on a photograph it comes out as the reverse.Bless.They broke the mould with that one.
RB
Now holidays are over, for a change I'm in a good mood. The fourth quarter is here already, but what did l miss in the last eight months. Looking back, only a couple of things nothing of real note. In an earlier entry I mentioned Jade Goody as a possible candidate for Governor of the Bank of England. I take it all back, policy should be decided using text voting - similar to pop idol or stars in their eyes. This has the double benefit of raising revenue for our new Darling and allowing Joe public to become much more engaged with setting things like interest rate policy. If you think rates should be cut by 25 basis points text CUT to 0870 123 456 or alternatively call the MPC to register your vote. Members will be there to take your call once a month. A small percentage of all call profits will go towards a charitable foundation, so current and future members can be taught basic practical economic theory and have access to learning facilities which allow them to think independently and maybe one day be released back into the financial community to sit on the board of a bank as a non-executive director or similar. All calls cost £1+ standard network charge.You get the idea.
The buffoons at the Bank of England have only themselves to blame for the current liquidity problems and consequent public mistrust of their handling of the Northern Rock Affair. Some commentators have suggested with the benefit of hindsight bias that oh yes it was a terrible business model anyway, they knew all along it would implode, it was a mismanaged company. Truth is the business model was a product of it's age and due to abnormal credit conditions it collapsed. Lending long and borrowing short makes perfect economic sense if short borrowing is cheap and plentiful.Back to the abnormal credit environment. I wonder how that happened? Well amid the buffoonery at the MPC quarter on quarter for a long time they forgot to act independently and kept leaving rates on hold, even while real inflation was creeping up. I'm not talking about the fudged rate from the even more incompetent ONS which all the government statisticians seem to have left.
The problem with the MPC of course is that they are all academic types-so the real world of rising oil, and agricultural commodities and house prices doesn't really impinge on their thinking. How do you manage a real economy on theoretical data. You can't- one has to be realistic and consider the real economy. King should have resigned when he had to write that letter to the then Chancellor. Even after mismanaging the economy so long through cowardly lack of decisiveness he is still in a job. So that's where my tax money goes to keeping these public sector geniuses in jobs they can't do and their final salary pensions. No thanks.
Lest you think l am picking on Mr King, Bernanke and the Fed are worse. A small taste of liquidity problems -and off he goes propping up the US economy, injecting liquidity (I think that's a euphemism for just printing more dollars), panic cutting rates by 50 basis points. All too late. The problem again is that he is an academic economist, rather like Mr King. Mr Bernanke used to teach at Princeton. He taught the cream of America. Rich and thick.
Was Northern Rock mismanaged. Answer:No. The businesses model was so simple and of the moment.You couldn't mismanage it.The quality of it's loan book seems extremely good still and default rates lower than market peers.No real impairment discounts need to be applied but prospective buyers want it cheap.The quality of non-executive directors also seems very high.Nicola Pease is not a fool, her husband is Crispin Odey and she can also claim consanguinity with John Varley of Barclays. Barclays, alas, was another victim of the credit crunch,what with funding all those off balance sheet conduits.It don't come cheap.In the end,it sounds like a strange proposition but the banks have been the biggest victims of poor central bankers in the UK and US.They will be the ones suffering job losses this Christmas.It doesn't lead to Dickensian poverty for the bankers,but the ghost of bonuses past will loom ever present.If you want to see what a great central banker looks like,try Jean-Claude Trichet.
The fourth quarter also means the results season is upon on us.The sub prime fallout started with it's first casualty Bear Stearns.For a one trick fixed income house gone mad on financial steroids,Bear stock had performed extremely well,then collapsed.It will come back-so hopes Joe Lewis who took a big position in the stock post collapse.If it works he will be even richer than he is now.I am reminded of a similar play on Citigroup by Prince Al Waleed bin Talal in the early 90s.It could work.Lehman's numbers were respectable.
So what went wrong at Merrill? 50 cents per share loss,that's no good.What happened to Stan's famous cost discipline / control environment? Well he got greedy see,sadly Mr Fakahany though he talks a good game on analysts conferences got lax.The real value add member of senior management in challenging operating environments for investment banks is the CFO.Ahmass alas was not there valuing the add.The last time Merrill made a loss on this scale was after the tech boom/bust.They subsequently went on to shed about 25% of their workforce globally.Merrill is the yo-yo dieter of the Investment Banking world.The payroll is once again bulging through four years of gluttonous hiring. Stan will start the blood letting soon.Expect CVs from ex-Merrill employees at a headhunter near you,very soon.He is a kind soul,so the axe should fall in November and take you right through Christmas.
Goldman deserves a paragraph to itself in this blog.Of course you are all aware US accounting standards allow more than a handsome degree of leeway in the method of attributing and calculating write-downs on illiquid and obscure instruments.Especially notional mark to market for complex products where due to lets say,a temporary market abnormalities and price dislocations you can't actually mark to market.It's a tricky area.I call it fudging.It's all legal though.I'm sure the auditors for the major investment banks know what I'm talking about.Been tempted to qualify any of the accounts of some of the investment banking clients,just a teeny weeny bit? Are you sure,you can tell me.I won't tell anyone.If you're a Big 3 audit partner please be sure to keep your professional indemnity insurance up to date won't you.I won't even charge you for that advice.I'm nice me.Where were we,Goldman.Everybody gets fucked,but Goldman is up 67% on the quarter.Whether it's due to great risk management or miraculous financial legerdemain,I have no idea,but most of seems down to David Viniar.As CFOs go in these awful organisations you can but admire his decision making skills.After all he has final say in allocation of capital risk.I have no idea what Lloyd Blankfein does (though he does have a striking resemblance to Jeff Bezos of Amazon.Are they the one and the same.I have never seen them together, so suspicions were aroused).Mr Viniar is my favourite CFO by a long way,for obvious reasons.
My other favourite CFO is Jonathan Asquith of Schroders for entirely different reasons. It's ok Jonathan your parting is on the correct side of your head, it's just on a photograph it comes out as the reverse.Bless.They broke the mould with that one.
RB
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