September 16, 2008
Merrill take-over by BofA, an informed decision?
Yesterday I expressed my concerns regarding the rational behind the take-over of Merrill Lynch. Today several commentators are wondering why BofA is willing to pay much more than the market value. It seems obvious there is more to it than the public at this moment knows. What is in it for BofA? Maybe there is a reason to share this with BofA’s shareholders? The initial view of analysts is that it probably is a forced deal and I’m inclined to agree with this. One day after the “deal” the is a general concern whether or not BofA can absorb Merrill’s troubles. It is almost impossible to make an informed decision on such a short notice. What guarantees have been given to BofA to take this risky jump in the dark? Another interesting question is whether or not it is possible to manage two take-overs in a period that is causing serious problems for every company in the financial industry.
From a BofA perspective a Lehman take-over would have been much more transparent. Although the risk management of Lehman proved to be inadequate, the management of Lehman in general has a much better track record when you look at business ethics or management integrity.
In the past year Merrill has been accused of many things except high moral standards. I’m really curious how many billion dollar surprises will emerge once BofA really takes over control. Revisiting the credit crisis events show that a reduced level of management integrity proved to be a reliable key risk indicator of corporate failure in difficult economic times. To substantiate this I’ve included a list of Merrill events covering the last 12 months. This list was extracted from the Riskfriends guided analysis. BofA shareholder read and think again!
|
Date |
Event |
Detail |
|
2008-09-14 |
Take over |
Bank of America did take over Merrill although it was |
|
2008-08-21 |
Law suits |
Agreed to buy back $ 12 billion of ARS and pay a fine of $ |
|
2008-08-04 |
Integrity concerns |
Merrill suspected of colluding with UBS manipulating the |
|
2008-07-29 |
Capital ratio recovery |
Planning to raise another $ 8.5 billion |
|
2008-07-29 |
Investment lost |
Lone Star Funds buys CDO’s from |
|
2008-07-23 |
Law suits |
Los Angeles |
|
2008-07-18 |
Capital ratio recovery |
Sold Bloomberg part back to the company for $ 4.4 billion. |
|
2008-07-18 |
Write off |
Totaling $ 9.4 billion, 30 percent CDO, 30 percent credit |
|
2008-07-07 |
Capital ratio recovery |
Selling parts of Bloomberg and Blackrock to raise another $17 |
|
2008-06-26 |
Prediction |
$ 4.2 billion write off predicted for the second quarter |
|
2008-04-18 |
Law suits |
Pension fund CtW investment |
|
2008-04-18 |
Job cuts |
2900 jobs in reaction to write down |
|
2008-04-17 |
Write off |
$9.5 bllion |
|
2008-04-02 |
Capital ratio recovery |
$12.2 billion raised so far |
|
2008-03-18 |
Liquidity issues |
Wachovia states that the exposure of Merrill is 3.3 the |
|
2008-03-11 |
Integrity concerns |
Congress questions Stanley O’neal |
|
2008-03-06 |
Job cuts |
Merrill Lynch said that it would stop making subprime |
|
2008-02-27 |
Investment lost |
Auction rate securities from Merrill |
|
2008-02-26 |
Management leaves |
CEO O’Neal steps down |
|
2008-02-08 |
Investigation |
SEC received request for information from the federal |
|
2008-02-07 |
Integrity concerns |
Accused by Massachusetts of fraud |
|
2008-02-01 |
Investment lost |
Merrill buying back $ 14 million of CDO’s |
|
2008-01-16 |
Write off |
$ 9.8 billion loss, write down $14.1 |
|
2008-01-15 |
Capital ratio recovery |
$ 6.6 billion cash raised issueing |
|
2008-01-14 |
Integrity concerns |
Finra investigating possible |
|
2008-01-11 |
Portfolio deterioration |
$15 billion write down expected |
|
2008-01-04 |
Integrity concerns |
Accused from hiding losses while merger was pending |
|
2007-12-24 |
Capital ratio recovery |
$ 7.5 billion acquired selling shares 13% below market |
|
2007-11-08 |
Integrity concerns |
SEC starts investigation investments |
|
2007-11-07 |
Portfolio deterioration |
Expected write offs 4th quarter another $9.4 according to CreditSights |
|
2007-11-03 |
Integrity concerns |
Merril not aware of |
|
2007-10-31 |
Law suits |
Lawsuits by shareholders |
July 7, 2008
Big rewards at no risk!
Analyzing the credit crisis, you can do that interactively yourself here, shows that the most troubled companies all have been in the news with integrity issues.
Some financial institutions did fire risk managers or at least blamed their risk management department for the unforeseen impact of the crisis. Any risk manager should have had a strategy in place that manages situations in which market mechanisms stop functioning. Risk managers know that VaR calculations do not cover extreme events. In the past the LTCM case, an analysis can be found here, already showed that markets can stop functioning. The best risk management department off course predicts when such events are likely to happen and enable a company to profit from such events. It looks like only Goldman Sachs managed to do this.
But what to do when the CEO starts making decisions that are conflicting with business ethics and that increase legal risk? The credit crisis interactive analysis shows that integrity issues are the most threatening and most damaging problems for a company. Just take a look at the events at Bear Stearns and Countrywide or remember what happened at Enron. These type of problems are difficult to manage by a company’s internal function, whether it is risk, compliance, audit or the board of directors. The internal functions simply do not have the power nor the authority to withstand a CEO. The board of directors are often at too much distance to remain in touch with the operational reality and at the same time they are often to close at the personal level to remain independent. UBS recognized this, be it a little late.
The credit crisis will probably result in more legislation or more focus at Basel II pillar three. Shareholders and employees became victims from inadequate management. Senior management however often walked away with millions of dollars. Big reward at no risk!
Some examples:
- O’neal from Merrill Lynch rewarded with $160 million leaving his bank in real trouble.
- Groenink from ABNAMRO rewarded with $ 40 million leaving his bank to be split into 3 pieces.
- Charles Prince from Citi rewarded with almost $ 100 million
- Sullivan from AIG rewarded with $ 47 million severance package
- Angelo Mozilla to profit from sale to BofA.. estimations vary but are in the range of several tens of millions.
Today Yahoo! reports that Countrywide employees fear for their severance pay.When will the first employee out of a job due to failing management start a lawsuit demanding equal severance pays?
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