Two Investment Bank Post-Mortems

Jennifer Hughes deserves some kind of medal for her magnificent article on Lehman Europe’s insolvency in this weekend’s FT.

Hughes’s piece clears up a large number of questions about UK law, the $8 billion taken from Lehman Europe by Lehman US, and the $40 billion of assets held by Lehman Europe’s prime brokerage operation. It paints the PricewaterhouseCoopers team now running Lehman as surprisingly competent — even after you make allowances for the fact that they’re the main sources for the article. And it’s written in prose of such clarity and internal coherence that you’re left in no doubt Hughes knows exactly what she’s talking about.

The contrast with Gretchen Morgenson’s similarly-ambitious piece on Merrill Lynch in the NYT is instructive.

Morgenson is a dab hand with her metaphors, especially when it comes to credit derivatives: Merrill was "trafficking" in them, she writes, in an "often inscrutable financial dance" which "transformed a financial brush fire into a conflagration" — and then on top there’s "wreckage" and "carnage" and risk becoming "viral". But it’s all telling and no showing: Morgenson never begins to quantify the losses associated with the synthetic CDOs she’s writing about.

Yves Smith reckons Morgenson’s statement that Merrill "dove into the C.D.O. market — primarily synthetics" means that "Merrill was writing more synthetic CDOs than the kind with underlying assets". That reading is fair enough, but the absence of any hard numbers in the article indicates to me that Morgenson simply doesn’t know for sure, and that a lot of her piece is simply conjecture.

What’s more, all of Morgenson’s Merrill sources are anonymous "former executives who requested anonymity to avoid alienating colleagues at Merrill" — a particularly weak construction. Is that reason really good enough for the New York Times to grant anonymity? Were any of these executives responsible for synthetic CDOs, or even the mortgage group more generally? Or are they just fired executives from other arms of the bank who are upset about Merrill’s fate and who are looking to point fingers? Answers, of course, come there none.

For me, the difference betwen the Hughes and Morgenson pieces is simple: the Hughes piece is genuinely informative, while the Morgenson piece is more of an exercise in bias confirmation. If, like Barry Ritholtz, you’re already inclined to believe Morgenson’s story, it’ll be grist to your mill. But if you’re looking for substantive new information in order to make up your mind, your efforts will be in vain.

(Thanks to Don for the link to the Hughes article. And if anyone can explain to me why the URL name of the Morgenson piece is 09magic.html, I’d be much obliged.)