Thursday, October 16, 2008

Merrill, Citi, UBS: What a Debacle!

Merrill Lynch, the investment bank which slyly sold itself to Bank of America the weekend Lehman went kaput, has proven to the world that it is consistently capable of losing $5 billion a quarter.  The former investment banking powerhouse posted a $5.2 billion loss on, um everything.  Merrill had a total of $9.5 billion related to, CDO's, leveraged loans, paying Temesek back for diluting the funds original investment, you name it.  $3.8 billion was specifically labeled as "write-downs tied to GSE's and other investment banks which were either taken over or failed during the month."  The company declined to offer more details on those investments only to say "yes, we really are that bad at managing risk."
In other horrible bank earnings news, the financial disaster powerhouse that is Citigroup lost $2.8 billion in the third quarter on more than $13.2 billion in charges bringing the total credit losses taken by the bank to an eye-popping $64 billion.  I now know for certain where Citigroup came up with the idea to sue Wells Fargo for $60 billion for stealing Wachovia.
Just as a small reassurance to the US taxpayer who may be reading this news with horror, rest assured that the US investment banking industry remains highly competitive with the rest of the world.  Even the Swiss, those conservative, secretive, banking geniuses, are getting bailouts from the Swiss government.  UBS announced that it is selling $60 billion in garbage to the Swiss government which will be taking a 9% stake in the firm.  Credit Suisse has opted not to take a government handout, but will be raising capital in order to shore up its adequacy ratios.
Needless to say, the global banking industry is in shambles.  But you already knew that because governments around the world have been bailing out their banking institutions.  
What all of this proves, using Merrill as an example, who has now given back all profits since 2001, is that the practice of paying out 50% of revenues in bonuses at investment banks was a complete and total joke.  I wrote a piece on August 4th claiming that the Fed's dramatic financing of illiquid assets of investment banks amounted to a subsidy for investment banking bonuses.  I used the example of Thomas Montag who was awarded a $40 million signing bonus to run Merrill's sales operation in early August.  In light of Merrill's $5 billion loss, Mr. Montag has obviously not been worth the $40 million that Merrill punted on his hire.  My post was viewed by some as controversial, because yet again, the claim was made that all of that great "talent" at banks would flee if it wasn't getting paid.  Maybe now we can return to a more normal world where the neighborhood urologist makes more money than the guy who's mispricing default risk on a CDO.   


Anonymous said...

What about the neighborhood pediatrician?

K10 said...

Was just throwing a bone to my pal, and loyal reader Big Ern. Obviously pediatricians are included...