It Ain't Over

Has it really been three weeks since I last made fun of Merrill Lynch? Well, I am back to fix that. Merrill reported first-quarter earnings yesterday, and it was another disaster. The third-largest investment bank lost almost two billion dollars, compared to a profit of over two billion in the year-ago quarter. It was the firm's third straight quarterly loss. Another $6.8 billion was written off for troubled assets (CLOs and mortgage-backed securities for those of you keeping score), raising the nine-month total to over $30 billion. Money heaven is running out of room to keep all that wealth.

Still, Merrill's CEO said that he was "optimistic" about the remainder of 2008. His remarks harmonized with those heard earlier this week from the CEOs of JPMorgan Chase, Lehman Brothers, and Goldman Sachs, all of whom sang the same tune: the worst of the credit crisis is behind us. This was music to the ears of Wall Street investors, who bid up stocks all week.

Don't be fooled. Nobody's dancing at Merrill, where 4,000 employees will be laid off. Today Citigroup (Q1 loss of $5 billion and write-downs totaling $12 billion) compounded the damage by announcing lay-offs of as many as 6,000. Add another 5,000 at Goldman and 7,000 at Bear Stearns, and pretty soon you're talking about some serious unemployment--over 30,000 up and down Wall Street.

The cheerleading by overpaid executives is a pathetic attempt to buoy investors' confidence and somehow to disrupt the negative feedback loop that threatens to take the financial sector down. The fact is that all these firms hold impaired assets for which there is no market. These collateralized debt/loan obligations--little more than cleverly formulated perfumes to mask the stench of worthless loans--amount to "your basic, garden-variety nuclear waste, which isn't trading," points out Minyanville's Bennet Sedacca. "So how you can you say the crisis is over when the market is frozen? To me, it will be over only when all of this garbage trades, defaults and clears the market. Not until."

So much for the banks on Wall Street. How about the ones on Main Street? On Wednesday Wachovia announced a quarterly loss and slashed its dividend. Particularly ominous were remarks during the conference call by Wachovia's Chief Risk Officer, Don Truslo, who noted that even their most creditworthy customers are abandoning upside-down mortgages. "When a borrower crosses the 100% loan to value," said Truslo, "their propensity to just default and stop building their mortgage rises dramatically and, I mean, really accelerates up." The bank's risk models did not see that one coming, so capital is being hoarded to boost reserves. That means less for business investment, which spells S-L-O-W-D-O-W-N.

At least Wachovia has a Chief Risk Officer. Merrill finally hired one of its own, but only after the sh-sugar hit the fan. And if Merrill wants me to stop picking on them, all they have to do is give Mainers our $20 million back.