Friday, November 30, 2007
Nelson's column:Merrill Lynch new CFO announced
I think I might be psychic.It's a big responsibility.It's the only 'skill' l have. After my piece yesterday,what should happen today-as if by magic.Oh Lordy!,Marketwatch reports that Mr Thain is hiring his CFO from NYSE,Nelson Chai,at Merrill.Looks like Jeff Edwards will get the heave ho or a 'lateral' move.No that's categorically NOT a demotion.You know that.He will probably be moved on to a similarly ''challenging" role.Let's all thank him first for doing an excellent job under very difficult circumstances.Right.
If I wasn't so short sighted my effigy-dart process would have revealed this yesterday.Damn.As l said he's the first of many that will be encouraged to look for other opportunities.Cool.Merry Christmas.
RB
If I wasn't so short sighted my effigy-dart process would have revealed this yesterday.Damn.As l said he's the first of many that will be encouraged to look for other opportunities.Cool.Merry Christmas.
RB
Thursday, November 29, 2007
Merrill Lynch:You don't have to be in-thain to work here,but it helps!
John Thain is starting at Merrill from Dec 1.Once a new CEO starts,especially with a specific mandate to turn around a company,the legacy senior management should be afraid.
He will be firing some of the current senior managers,partly to draw a line in the sand to mark the beginning of his reign.Also to make room for Mr Thain to hire his own people.
I've been taking bets with my friends as to who we might think would get chopped.It's fun but hard.Our opinion is that all the Merrill's current senior management is pretty so so.It could be anyone.Being smart,even-handed,sensitive and logical people we devised an almost fool proof way of predicting the first two out of the door.
We bought small effigies (about 7 inches tall) to represent each current senior manager,stood them on a table.Stepped back ten paces and then threw darts at them.
I had two hits.Well l'm short sighted.The first 'hit' was Ahmass Fakahany.Creepy.Well it was under his watch as risk manager that the balance sheet got loaded up with rubbish,and credit exposure went out of control.So if my voodoo dart throwing process is any good,he'll be shown the door.
The second 'hit' was Greg Fleming.I was slightly bemused.He is co-president with Mr Fakahany.What is lady luck trying to tell me.I have no idea.Yet still l believe the effigy-dart method to be very reliable .I think he will get chopped by Mr Thain because he's always grinning.In every picture l see of him,a Peter-Panesque grinning Mr Fleming stares out into the abyss.It's not good to exhibit so much good humour in such solemn times.Too much jollity on the shop floor is not appropriate.I trust my process,so l think he'll be gone too.
Of course the big redundancy program for everyone else will also be announced once Mr Thain gets on board and settled.Very excited,can't wait.Hope it's before Christmas.
RB
He will be firing some of the current senior managers,partly to draw a line in the sand to mark the beginning of his reign.Also to make room for Mr Thain to hire his own people.
I've been taking bets with my friends as to who we might think would get chopped.It's fun but hard.Our opinion is that all the Merrill's current senior management is pretty so so.It could be anyone.Being smart,even-handed,sensitive and logical people we devised an almost fool proof way of predicting the first two out of the door.
We bought small effigies (about 7 inches tall) to represent each current senior manager,stood them on a table.Stepped back ten paces and then threw darts at them.
I had two hits.Well l'm short sighted.The first 'hit' was Ahmass Fakahany.Creepy.Well it was under his watch as risk manager that the balance sheet got loaded up with rubbish,and credit exposure went out of control.So if my voodoo dart throwing process is any good,he'll be shown the door.
The second 'hit' was Greg Fleming.I was slightly bemused.He is co-president with Mr Fakahany.What is lady luck trying to tell me.I have no idea.Yet still l believe the effigy-dart method to be very reliable .I think he will get chopped by Mr Thain because he's always grinning.In every picture l see of him,a Peter-Panesque grinning Mr Fleming stares out into the abyss.It's not good to exhibit so much good humour in such solemn times.Too much jollity on the shop floor is not appropriate.I trust my process,so l think he'll be gone too.
Of course the big redundancy program for everyone else will also be announced once Mr Thain gets on board and settled.Very excited,can't wait.Hope it's before Christmas.
RB
Tuesday, November 27, 2007
Merrill Lynch:SELL
Yesterday Greg Fleming,Merrill's co-president told his minions,that he has "tremendous confidence" in the company's long term prospects.I worry about his mental health.
When senior staff talking like this it means one of two things.Firstly he is about to leave the company and needs to prop up the equity to cash in as he goes.Or secondly he has no clue what's really wrong with Merrill.The senior management should look in the mirror,they are the problem.
Famous last words like this also mean they are tempting fate.Watch how the shares prices tanks in the coming weeks.
RB
When senior staff talking like this it means one of two things.Firstly he is about to leave the company and needs to prop up the equity to cash in as he goes.Or secondly he has no clue what's really wrong with Merrill.The senior management should look in the mirror,they are the problem.
Famous last words like this also mean they are tempting fate.Watch how the shares prices tanks in the coming weeks.
RB
Saturday, November 24, 2007
Gieve & Hawks and why recessions are good.
Sir John Gieve is normally naturally Hawkish.As a Deputy Governor of The Bank of England his judgement is usually better than Mr King.As the real possibility of a recession appears on the horizon (well l never!), coupled with serious liquidity and credit quality issues even he's changed his mind. He is deputy Governor responsible for financial stability.So voting for a cut in the current environment for him makes sense.His boss has made financial markets unstable and to some extent he has to fix it.Of course it's an absurd suggestion when you keep in mind pricing pressure and real world inflation.
Rates need to rise in the short term to stem inflation.They also need to rise because both the UK (and the US) need a recession.Central Bankers and economists seem to have forgotten that they are a necessary part of the economic cycle.They allow the bloodletting needed to ease asset price bubbles,namely housing.Trying to avoid a recession is like trying to cheat death.It will get you in the end.It's just a matter of time.
Recessions of the non-depression era variety are excellent for businesses in the long term.Badly run companies fold.Increased unemployment means wage push inflation slows.After all if you're afraid of losing your job,you're not going to whine about no pay rises for a few years.
Recessions are secretly even more welcome in banks.Especially by senior managers.You can legitimately get rid of all the underlings you disliked.More importantly you can 'encourage' all the bright young things to leave.In an industry where endurance and cunning are more important than intelligence smart people have to be shaken out.For three reasons,firstly if you're a senior manager they could become a potential threat to you in future.Get rid of the competition,and you're safe for another five years.Secondly you need smart people to do jobs that can be of benefit to you in future.You need to know that if ever you need a dentist,doctor,architect etc that that person will be brighter than you are.Otherwise what's the point in having all that money.Thirdly recessions are good in the here and now.First class cabins become a lot less full,hotel suites less expensive,nice restaurants are quieter.Second,third,and fourth homes get cheaper.The Maybach waiting list shortens,its not all bad.Even if you get laid off in a downturn,you'll get paid off as well.So you can sit it out.
Sir Gieve is wrong we need emergency rate rises,all the way up to 10% at least.
All in all recessions are desirable if you're long cash and not overleveraged.I can't wait for it.I'm already planning my holiday schedule and a list of new property purchases as prices collapse.What about you?
RB
Rates need to rise in the short term to stem inflation.They also need to rise because both the UK (and the US) need a recession.Central Bankers and economists seem to have forgotten that they are a necessary part of the economic cycle.They allow the bloodletting needed to ease asset price bubbles,namely housing.Trying to avoid a recession is like trying to cheat death.It will get you in the end.It's just a matter of time.
Recessions of the non-depression era variety are excellent for businesses in the long term.Badly run companies fold.Increased unemployment means wage push inflation slows.After all if you're afraid of losing your job,you're not going to whine about no pay rises for a few years.
Recessions are secretly even more welcome in banks.Especially by senior managers.You can legitimately get rid of all the underlings you disliked.More importantly you can 'encourage' all the bright young things to leave.In an industry where endurance and cunning are more important than intelligence smart people have to be shaken out.For three reasons,firstly if you're a senior manager they could become a potential threat to you in future.Get rid of the competition,and you're safe for another five years.Secondly you need smart people to do jobs that can be of benefit to you in future.You need to know that if ever you need a dentist,doctor,architect etc that that person will be brighter than you are.Otherwise what's the point in having all that money.Thirdly recessions are good in the here and now.First class cabins become a lot less full,hotel suites less expensive,nice restaurants are quieter.Second,third,and fourth homes get cheaper.The Maybach waiting list shortens,its not all bad.Even if you get laid off in a downturn,you'll get paid off as well.So you can sit it out.
Sir Gieve is wrong we need emergency rate rises,all the way up to 10% at least.
All in all recessions are desirable if you're long cash and not overleveraged.I can't wait for it.I'm already planning my holiday schedule and a list of new property purchases as prices collapse.What about you?
RB
Tuesday, November 20, 2007
The bountiful rewards of destructive capitalism:Adam Applegarth,a modern executive's hero
Adam Applegarth:Who's the fool?
I'm bored of the whole Northern Saga.Why shouldn't the tax payers pick up the bill.Apparently it's costing each tax payer in the UK £900 per head.
The public should regard this cost as a kind of idiot tax for employing morons in high public office,for example Darling.Public sector posts,including regulators and the Bank of England will normally attract the poorest quality job applicants.It's just a given.All things being equal,why would you become a civil servant and not a hedge fund manager? These left over no-hopers man the regulators and other 'supervisory' bodies.If you spend long enough in 'public service' you can get knighted and a nice pension.It's actually not a bad life at the top of these organisations.No accountability and endless financing underwritten by the populous.
I saw Adam Applegarth being quizzed by the treasury select committee.He's got a lovely soft voice, and a ye olde bank manager's manner.In another life he would have made a nice vicar or provincial GP.Trust me l'm a Doctor.Dr Strangelove.
Here's why the man is a genius.He worked out long before everyone else that globalisation meant that when he was 21 and looking for a job,he could make his fortune by staying in a nice backward part of the country.Namely Northumberland.A strange hybrid county,neither England nor Scotland,but generally encompassing the worst aspects of both.In this eternally drab landscape,he takes a provincial building society,floats it,re-engineers the business model.
He effectively ran an intermediary operation for packaged mortgage debt remotely from Newcastle for some of the more aggressive US investment banks,including Lehman.Unlike his counterparts running trading desks in the London based investment banks,Mr Applegarth ran one product,mortgages.Nothing fancy,exotic or complex.He got to come into work about 9ish,leave by 5.He is by his own admission a sports fanatic,so he followed his favourite football team.He was also captain of Sunderland cricket club.All in all he has and had a very good quality of life and held down nice undemanding day job.
He became CEO of the Rock in 2001,aged 39.His base compensation in 2007 was 760K.Lets add pension rights,bonus,and equity etc.Make the assumption that he made approximately 1.5 million per year since 2001.Lets do some rough and ready calculations then,ignore time value of money etc:
2001-2007 = 1.5 x 6= 9 million total comp
1983- 2001 =assume 8 million total comp
By my very rough numbers,I think he has taken about about 17 million pounds over his 24 years at Northern Rock.He wasn't particularly well paid as a FTSE 100 CEO,still he wasn't starving either.He has had an excellent quality of life up north.I'm told a million half a year is a lot of money in Gosforth.Now at 45 can now retire very happily.
He has therefore been quietly collecting little and often over 24 years,and now the game's up.I doubt if he's particularly bothered.It was just a job.
If you're middle aged investment banker in London reading this at 2 am at your desk.Rubbing your eyes,wondering whether your total comp might even reach half a million pounds.Think about the genius of Applegarth's approach.He's collected 17 million pounds , been and gone.He didn't have to compete in the urban rat race,work late,have to engage in bitchy office politics or learn about anything more complex than a mortgage.Who's the fool ?
RB
I'm bored of the whole Northern Saga.Why shouldn't the tax payers pick up the bill.Apparently it's costing each tax payer in the UK £900 per head.
The public should regard this cost as a kind of idiot tax for employing morons in high public office,for example Darling.Public sector posts,including regulators and the Bank of England will normally attract the poorest quality job applicants.It's just a given.All things being equal,why would you become a civil servant and not a hedge fund manager? These left over no-hopers man the regulators and other 'supervisory' bodies.If you spend long enough in 'public service' you can get knighted and a nice pension.It's actually not a bad life at the top of these organisations.No accountability and endless financing underwritten by the populous.
I saw Adam Applegarth being quizzed by the treasury select committee.He's got a lovely soft voice, and a ye olde bank manager's manner.In another life he would have made a nice vicar or provincial GP.Trust me l'm a Doctor.Dr Strangelove.
Here's why the man is a genius.He worked out long before everyone else that globalisation meant that when he was 21 and looking for a job,he could make his fortune by staying in a nice backward part of the country.Namely Northumberland.A strange hybrid county,neither England nor Scotland,but generally encompassing the worst aspects of both.In this eternally drab landscape,he takes a provincial building society,floats it,re-engineers the business model.
He effectively ran an intermediary operation for packaged mortgage debt remotely from Newcastle for some of the more aggressive US investment banks,including Lehman.Unlike his counterparts running trading desks in the London based investment banks,Mr Applegarth ran one product,mortgages.Nothing fancy,exotic or complex.He got to come into work about 9ish,leave by 5.He is by his own admission a sports fanatic,so he followed his favourite football team.He was also captain of Sunderland cricket club.All in all he has and had a very good quality of life and held down nice undemanding day job.
He became CEO of the Rock in 2001,aged 39.His base compensation in 2007 was 760K.Lets add pension rights,bonus,and equity etc.Make the assumption that he made approximately 1.5 million per year since 2001.Lets do some rough and ready calculations then,ignore time value of money etc:
2001-2007 = 1.5 x 6= 9 million total comp
1983- 2001 =assume 8 million total comp
By my very rough numbers,I think he has taken about about 17 million pounds over his 24 years at Northern Rock.He wasn't particularly well paid as a FTSE 100 CEO,still he wasn't starving either.He has had an excellent quality of life up north.I'm told a million half a year is a lot of money in Gosforth.Now at 45 can now retire very happily.
He has therefore been quietly collecting little and often over 24 years,and now the game's up.I doubt if he's particularly bothered.It was just a job.
If you're middle aged investment banker in London reading this at 2 am at your desk.Rubbing your eyes,wondering whether your total comp might even reach half a million pounds.Think about the genius of Applegarth's approach.He's collected 17 million pounds , been and gone.He didn't have to compete in the urban rat race,work late,have to engage in bitchy office politics or learn about anything more complex than a mortgage.Who's the fool ?
RB
Friday, November 16, 2007
No Thain, no gain:The asymmetry of risk / reward in the boardroom
No Thain, no gain:The asymmetry of risk / reward
Here's a strange thing.John Thain is taking the top job at Merrill.He must be bored indeed.
For his troubles, if he can turn the house around,his incentive bonus will be in the region of 100 million dollars.Stan took 160 million dollars for his part in Merrill's current downfall.Does that make any sense to you?
The compensation culture in investment banking and financial markets has turned the concept of performance based pay on it's head.If l destroy a company l can now expect to get paid more than if l run a company properly.It's completely counter-intuitive to the real world.It's how the mad hatter would structure a bonus culture.I love it.
RB
Here's a strange thing.John Thain is taking the top job at Merrill.He must be bored indeed.
For his troubles, if he can turn the house around,his incentive bonus will be in the region of 100 million dollars.Stan took 160 million dollars for his part in Merrill's current downfall.Does that make any sense to you?
The compensation culture in investment banking and financial markets has turned the concept of performance based pay on it's head.If l destroy a company l can now expect to get paid more than if l run a company properly.It's completely counter-intuitive to the real world.It's how the mad hatter would structure a bonus culture.I love it.
RB
A King's Ransom
He is apparently a brilliant economist.For me he is also the least able central banker in the developed world.
The governor has announced that there are likely be a number of rate cuts in 2008.Apparently this will be achieved despite the fact that oil prices are hovering around an all time high with no sign of weakness in the near term and metal prices and agricultural commodity prices are also increasing.All this indicates a 2008 environment of higher inflation and stagnant economic growth.Stagflation even.
The Bank of England's mandate is to be vigilant on inflation.Lowering rates in future won't achieve this.I have no idea what Mr King is talking about.I'm wondering whether he does either.
His performance this year doesn't fill me with confidence.
Let's look at the list of his recent achievements in 2007.Keeping inflation under control.Failed,had to write letter to chancellor.Oops.
Not pumping liquidity into capital markets when appropriate. Unlike the Fed and ECB,he didn't bother.This may have stopped the first run on a bank for 140 years.
Northern Rock,the farcical shenanigans and volte face on 'moral hazard' that led to systemic loss of confidence in UK banks & regulators.
Radio 4 interview,''I'm not to blame really,it's just l was ''bullied'' by Darling et al.
On balance I'm not sure a second term for the governor is appropriate.Given his recent musings,something tells me things are about to get worse on his next watch.In the land of the blind the one eyed man is king.
RB
The governor has announced that there are likely be a number of rate cuts in 2008.Apparently this will be achieved despite the fact that oil prices are hovering around an all time high with no sign of weakness in the near term and metal prices and agricultural commodity prices are also increasing.All this indicates a 2008 environment of higher inflation and stagnant economic growth.Stagflation even.
The Bank of England's mandate is to be vigilant on inflation.Lowering rates in future won't achieve this.I have no idea what Mr King is talking about.I'm wondering whether he does either.
His performance this year doesn't fill me with confidence.
Let's look at the list of his recent achievements in 2007.Keeping inflation under control.Failed,had to write letter to chancellor.Oops.
Not pumping liquidity into capital markets when appropriate. Unlike the Fed and ECB,he didn't bother.This may have stopped the first run on a bank for 140 years.
Northern Rock,the farcical shenanigans and volte face on 'moral hazard' that led to systemic loss of confidence in UK banks & regulators.
Radio 4 interview,''I'm not to blame really,it's just l was ''bullied'' by Darling et al.
On balance I'm not sure a second term for the governor is appropriate.Given his recent musings,something tells me things are about to get worse on his next watch.In the land of the blind the one eyed man is king.
RB
Sunday, November 04, 2007
Bear Necessities, Cayne it!:A salutary lesson in workplace presenteeism
"Puritanism: The haunting fear that someone, somewhere, may be happy"
The Wall Street Journal is a pretty run of the mill paper.Editorials tend to be good.The quality of the rest of the journalism is quotidian the rest of the time.So there I was reading this weekend's European edition.There's an article on page 12 & 13 on the great and the good-how the top dogs spent the summer of 2007, but mainly focusing on James Cayne's behaviour.
The writer, Kate Kelly reproves Mr Cayne's behaviour,apparently "James Cayne hit golf links,bridge tournaments amid summer turmoil",and shock horror "In the critical month of July,he spent 10 of the 21 work-days out of the office,either at ..(a).. Bridge event or golfing".
Worse still the cardinal sin of a puritan and largely stupid work ethic,"In summer weeks,he typically left the office on Thursday afternoon and spent Friday at his New Jersey golf club"..and -oh my god-"out of touch".Burn him.It does sound like he's definitely in league with the Devil.
God forbid the poor man should have outside interests and put his leisure time ahead of 'work' interests.The writer goes on the compare and contrast this with Lloyd Blankfein who "cancelled plans to spend to spend the last two weeks of August at his Beach house,missing a chance to spend time with his sons before they headed to college.Through the summer's market gyrations,Mr Blankfein frequently visited Goldman mortgage desks."Yes his family must be really pleased with him.I think we are all supposed to admire Mr Blankfein.Instead he ends up sounding like a work obsessed,boring,lonely,control freak,micro manager,with literally no life outside work.A similarly Stakhanovite picture is painted of other wall street managers,like Chuck Prince of Citigroup.
Lets put it another way,I bet Stan O'Neal and his cronies were in the office all summer long.All he managed to do was get fired and tank the company.Later today the Citi Board will be sacking Mr Prince. NICE.
The Wall Street Journal is a pretty run of the mill paper.Editorials tend to be good.The quality of the rest of the journalism is quotidian the rest of the time.So there I was reading this weekend's European edition.There's an article on page 12 & 13 on the great and the good-how the top dogs spent the summer of 2007, but mainly focusing on James Cayne's behaviour.
The writer, Kate Kelly reproves Mr Cayne's behaviour,apparently "James Cayne hit golf links,bridge tournaments amid summer turmoil",and shock horror "In the critical month of July,he spent 10 of the 21 work-days out of the office,either at ..(a).. Bridge event or golfing".
Worse still the cardinal sin of a puritan and largely stupid work ethic,"In summer weeks,he typically left the office on Thursday afternoon and spent Friday at his New Jersey golf club"..and -oh my god-"out of touch".Burn him.It does sound like he's definitely in league with the Devil.
God forbid the poor man should have outside interests and put his leisure time ahead of 'work' interests.The writer goes on the compare and contrast this with Lloyd Blankfein who "cancelled plans to spend to spend the last two weeks of August at his Beach house,missing a chance to spend time with his sons before they headed to college.Through the summer's market gyrations,Mr Blankfein frequently visited Goldman mortgage desks."Yes his family must be really pleased with him.I think we are all supposed to admire Mr Blankfein.Instead he ends up sounding like a work obsessed,boring,lonely,control freak,micro manager,with literally no life outside work.A similarly Stakhanovite picture is painted of other wall street managers,like Chuck Prince of Citigroup.
Lets put it another way,I bet Stan O'Neal and his cronies were in the office all summer long.All he managed to do was get fired and tank the company.Later today the Citi Board will be sacking Mr Prince. NICE.
RB
Saturday, November 03, 2007
Iceberg theory,losses :Merrill Lynch going private?
Oh Dear.Another day another billion dollar writedown.When does it stop.I did warn you about Merrill's off balance sheet exposure in the last blog.Now this week it's been investigated by the SEC for off balance sheet loss manipulation.Bad Luck.Another 10$ billion could be written down.This should not come as a surprised to anyone except the Board of Directors at Merrill.Oh well you snooze,you lose.Their PR spokesperson denies this.Last year's financial statements are fiction,why anyone would believe the PR department l have no idea. So what next?
In the coming months,once the dubious quality of the accounting becomes apparent there will be further writedowns.So far the approximate numbers are 8$ billion+ another 10$ billion to come. I expect true exposure in reality is in the region of 50$ billion. So expect at least another 32$ billion in writedowns.
This is how I got to the 50$ billion as the 'real' writedown.Assume all management are at worst economical with the truth and at best have no idea what's going on;especially in investment banks and particularly if they think it will prop up the share price.Now use iceberg theory. The initial number is only 10% of the true figure, the other 9/10 ths are below the surface.Initial writedown estimates were approximately 5$ billion.Multiply by 10=50$ billion. Current Market Cap at Friday's close (59.71$) was 49$ billion. Take the 10 yet to be written down plus the other 32 , that should leave a market cap of around 7$ billion dollars if it survives as an on-going concern/independent entity.It's not rocket science is it?
So my made up target price of 15$ still stands.It's a better valuation than the rubbish the analysts are peddling. I'll be a net buyer at this price.The brand equity is roughly worth about 6$ a share ( 50 cents for each letter in the name, there are 12 letters),add $9 for on-going operations.
So what does the future hold for Merrill's various stakeholders?
Employees
If you're an employee wait for the mass severance package offer like the one in 2001/2. The party is just beginning,so if you're planning on staying in the firm,hold on real tight.The storm hasn't even arrived yet. If you are higher up at ML and have been comped in restricted stock,stock options and similar equity related incentives,you really should have got out at the end of last year and known better.Now don't you feel like a fool.Oh Well a fool and his money were lucky to get together in the first place.
Stockholders
Stockholders will probably start to litigate quite soon for misrepresentation etc quite soon,and breach of fiduciary duty by the Directors. So the firm should expect a host of class actions, coming to a Merrill Office near you very soon.
Auditors
If you're an audit partner at Deloitte LLP, New York.Expect litigation for a job done badly.Did you check your PI insurance like I told you to in the last blog?
The Firm
As the firm's creditworthiness begins to deteriorate, in fact it's already happening look at the credit default swap prices of it's bonds,financing will get a lot more expensive. The ratings agencies will start downgrading it's debt.Who knows in a peculiar twist of fate, they could become sub-investment grade.They themselves could become sub-prime.They could then buy their own debts, re-package them as CDOs and shove them off balance sheet into a SIV-lite. Maybe flog it to Citigroup.That's the financial engineering equivalent of eating your own vomit.How cool would that be.
There is one avenue which looks increasingly likely, it could be taken private. It will soon become a classic distressed asset play.So it goes private.De-leverages, gets rid of all non- core business.Keeps brokerage,M&A, underwriting.Reduces proprietary trading, reallocates capital. It's an easy way out.Sounds crazy.Well think about this.Of the current board of twelve.Three of them are ex-private equity boys and girls.Charles Rossotti ( advisor to The Carlyle Group), Ann N.Reese ( Clayton,Dubilier & Rice) and wait for it, the current acting Chairman, Alberto Cribiore ( Clayton, Dubilier & Rice and Brera Capital).If you're telling me that this hasn't crossed their minds, I'd be surprised.
Personally I'm still hoping it will still go under.That's my preferred outcome.This is called destructive capitalism.
RB
In the coming months,once the dubious quality of the accounting becomes apparent there will be further writedowns.So far the approximate numbers are 8$ billion+ another 10$ billion to come. I expect true exposure in reality is in the region of 50$ billion. So expect at least another 32$ billion in writedowns.
This is how I got to the 50$ billion as the 'real' writedown.Assume all management are at worst economical with the truth and at best have no idea what's going on;especially in investment banks and particularly if they think it will prop up the share price.Now use iceberg theory. The initial number is only 10% of the true figure, the other 9/10 ths are below the surface.Initial writedown estimates were approximately 5$ billion.Multiply by 10=50$ billion. Current Market Cap at Friday's close (59.71$) was 49$ billion. Take the 10 yet to be written down plus the other 32 , that should leave a market cap of around 7$ billion dollars if it survives as an on-going concern/independent entity.It's not rocket science is it?
So my made up target price of 15$ still stands.It's a better valuation than the rubbish the analysts are peddling. I'll be a net buyer at this price.The brand equity is roughly worth about 6$ a share ( 50 cents for each letter in the name, there are 12 letters),add $9 for on-going operations.
So what does the future hold for Merrill's various stakeholders?
Employees
If you're an employee wait for the mass severance package offer like the one in 2001/2. The party is just beginning,so if you're planning on staying in the firm,hold on real tight.The storm hasn't even arrived yet. If you are higher up at ML and have been comped in restricted stock,stock options and similar equity related incentives,you really should have got out at the end of last year and known better.Now don't you feel like a fool.Oh Well a fool and his money were lucky to get together in the first place.
Stockholders
Stockholders will probably start to litigate quite soon for misrepresentation etc quite soon,and breach of fiduciary duty by the Directors. So the firm should expect a host of class actions, coming to a Merrill Office near you very soon.
Auditors
If you're an audit partner at Deloitte LLP, New York.Expect litigation for a job done badly.Did you check your PI insurance like I told you to in the last blog?
The Firm
As the firm's creditworthiness begins to deteriorate, in fact it's already happening look at the credit default swap prices of it's bonds,financing will get a lot more expensive. The ratings agencies will start downgrading it's debt.Who knows in a peculiar twist of fate, they could become sub-investment grade.They themselves could become sub-prime.They could then buy their own debts, re-package them as CDOs and shove them off balance sheet into a SIV-lite. Maybe flog it to Citigroup.That's the financial engineering equivalent of eating your own vomit.How cool would that be.
There is one avenue which looks increasingly likely, it could be taken private. It will soon become a classic distressed asset play.So it goes private.De-leverages, gets rid of all non- core business.Keeps brokerage,M&A, underwriting.Reduces proprietary trading, reallocates capital. It's an easy way out.Sounds crazy.Well think about this.Of the current board of twelve.Three of them are ex-private equity boys and girls.Charles Rossotti ( advisor to The Carlyle Group), Ann N.Reese ( Clayton,Dubilier & Rice) and wait for it, the current acting Chairman, Alberto Cribiore ( Clayton, Dubilier & Rice and Brera Capital).If you're telling me that this hasn't crossed their minds, I'd be surprised.
Personally I'm still hoping it will still go under.That's my preferred outcome.This is called destructive capitalism.
RB
