Pick & Choose

“Stanley O'Neal's credibility just suffered a major blow. It isn't only that Merrill Lynch, the Wall Street firm he runs, took $7.9 billion of write-downs just on subprime mortgages and collateralized debt obligations for the third quarter, more than any of its peers. What is worse is that the hit is a lot larger than the $4.5 billion Mr. O'Neal recently warned of.

“How could things change so drastically? After all, the write-downs are tied to a specific point in time, Sept. 28, so market fluctuations since then shouldn't have changed anything. Merrill says it just decided to use ‘more conservative assumptions.’

“That might sound wise, but it actually raises concerns. It confirms market worries that investment banks are able to pick and choose how they price their assets -- and that could erode any tentative attempts to rebuild confidence in the market.

“More worrying for Merrill's investors, it reeks of dilettantish risk management. There have been more than enough signs this year that mortgage markets were cratering. And Merrill was arguably in a better position than most of its peers to judge the extent of the wreckage.

“After all, it owns a mortgage lender, First Franklin… The business -- especially its loan-servicing unit -- ought to have provided exactly the kind of information on the subprime market that Mr. O'Neal needed to stay ahead of the curve. Merrill also was the top CDO arranger in 2006 and is in second place this year. That should have given it a bird's eye view of the market…

“It seems irresponsible that Merrill wasn't much better prepared for the ensuing rush for the exits.

“Instead, it appears it was simply too deep into a market that its executives didn't fully understand.”

(“breakingviews.com / Financial Insight: Implausible Deniability?; Merrill and Mr. O'Neal Should Have Been Atop Credit-Market Problems.” Wall Street Journal: October 25, 2007. pg. C.14)

WE SEE what we choose to see. We read, and watch, and listen to that which comforts us in confirming what we want to believe. Deeper and deeper we dig into that until we may be over our heads. Watch out outward.