大象传媒

Merrill's mess

• Robert Peston
• 29 Oct 07, 09:19 AM

All weekend, wave after wave of schadenfreude has been crashing on the head of Stan O鈥橬eal, the chairman of Merrill Lynch. After Merrill announced those colossal losses on inventories of sub-prime loans reprocessed into noxious collateralised debt obligations, O鈥橬eal could not survive.

The point is that Merrill鈥檚 historic strengths have been as an agent, a broker, not a risk-taker. So its veterans into the 鈥淚-told-you-so鈥� dance when 鈥渘ew Merrill鈥� came a cropper from putting its capital at risk in the manufacture of securities out of loans to US homeowners with poor credit histories.

But it鈥檚 the ghost of Christmas yet-to-come that really did for O鈥橬eal. I can be confident of that from the tedious moaning of old mates who work at Merrill. They鈥檙e whinging that they are being short-changed on this year鈥檚 bonuses because of the humungous losses chalked up on sub-prime. If they鈥檙e making a sacrifice for the good of the firm, someone has to pay.

The real power in any investment bank rests with its fee-generators and top traders, rather than with its shareholders or even its board, because it鈥檚 curtains for the firm if they鈥檙e alienated.

Merrill鈥檚 board, in negotiating O鈥橬eal鈥檚 departure, has simply been trying to preserve the integrity of a giant, money-making collective.

For the rest of us, the Merrill mess is an occasion to breathe a sigh of relief about what might have been 鈥� and cross our fingers about what might yet be to come.

Just imagine the carnage if the credit losses of a Merrill Lynch had been married to the intrinsic funding weakness of a Northern Rock.

A great deal has been made 鈥� rightly 鈥� about the flaws in the global financial system, in which trillions of dollars of loans have been packaged up into a dizzying number and variety of securities that have then been sold and then resold. What we learned from the panic that ensued in markets this summer is the potential harm that flows when major financial institutions have no idea what has happened to the risks associated with all that lending.

But the differing debacles at Merrill Lynch and Northern Rock point to at least one saving grace, which is that the worst loan losses have not occurred in a major institution with inadequate access to liquid funds,

However that may be due to luck more than anything else. And we cannot assume it won鈥檛 run out.

As the last week, we may be about to enter a second horrible phase of the credit crunch. A general tightening of credit conditions could cause serious difficulties for weaker borrowers, if they鈥檙e unable to refinance their debts, and also wider discomfort if there is a slowdown in economic growth.

Which is why all the bankers I meet are still battening down the hatches and are desperately trying to ensure they have access to sufficient cash or liquidity to weather any storm.

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