Tuesday, October 30, 2007

Before You Jump, Understand The Real Cost of the Losses at Merrill Lynch

In reading the comments on this blog and others many are very adamant that companies like Merrill Lynch or Citigroup (or whatever) should pay totally for the mistakes they made in the credit markets. So if they fail “so be it”. Just realize that these are very large firms that employ a lot of people. Forget the few executives that made a series of profit driven decisions without properly weighing the risk. There are a lot of people that get up every day, go to work, do a good job, support a family, etc. What do you do with those people? It is easy to make quick judgments, but in many cases the human cost of the decisions come at a very high price. Don't get me wrong, I am not condoning what many of these firms did, but one needs to look at the total cost of their failure. Besides where were the regulators, the board of directors, the risk department, auditors, and shareholders when all this was occurring? No group in their right mind pushes for big profits today when they realize that they could lose it all six months from now. How come no one is talking about these people?

Text in bold is my emphasis. From Bloomberg:

The real damage to shareholders came with Merrill's $8.4 billion writedown. It is the biggest in the history of Wall Street and wiped out four quarters of growth in shareholders' equity, according to Merrill's published figures. The charge, mostly for collateralized debt obligations and subprime mortgages, left the New York-based company with $38.8 billion of assets minus liabilities.

Losing ``20 percent of shareholders' equity in one fell swoop is a serious blow,'' said Robert Willens, the accounting analyst at Lehman Brothers Holdings Inc. in New York. ``It might take them two to three years to earn that capital back.''

``What they lost is likely to be more than they made in the last two years in CDOs,'' Hintz said. ``You can't put it all down to CDOs, but it's not a bad estimate.''

Merrill estimates it had $38.8 billion of shareholders' equity at the end of September, down from $42.2 billion in June.

The firm still has $15.2 billion of CDOs, less than half the amount it held at the end of June. Merrill may have to write down another $4 billion in the fourth quarter, said Meredith Whitney, a New York-based analyst at CIBC World Markets, in a note to clients last week.

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