There is absolutely no silver lining to the $8.4
billion in writedowns that Merrill Lynch announced today. Merrill is being
hit from all sides: sell-side analysts, on the conference
call; journalists;
agencies; and, of course, the stock
market. Dana Cimilluca is looking at the magnitude
of the loss and coming to the conclusion that it’s absolutely enormous by
any measure.
But the biggest hit, in the long term, will be to Merrill’s reputation. I’m
old enough to remember when Merrill was the number one debt house in the world:
the Thundering Herd was known and feared across Wall Street as the best of the
best when it came to bond trading. They made the biggest profits, they had the
biggest market share, they earned the biggest bonuses.
Now, however, all that is gone. If Merrill couldn’t even judge the extent of
its losses accurately at the end of September, there’s no reason whatsoever
to believe that it has its act together now. Merrill is now trading on a price-to-book
ratio of 1.54, compared to 2.47 for Goldman Sachs. If Merrill’s share price
is going to recover, its management is going to have to get the denominator
up a lot. Because the ratio itself is going to stay in the doldrums for the
foreseeable future.