Random Thoughts on The City, Wall St & Capitalism

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