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Merrill in the mire

• Robert Peston
• 17 Jan 08, 03:11 PM

If it weren’t that investment bankers have tough hides and short memories, I’d wonder whether could bounce back from the humiliating losses it has announced today.

The damage is not just financial, although the scale of its losses almost defies comprehension.

For a firm of its size , and just under $9bn for the whole year, is life threatening.

Merrill has only survived thanks to lifesaving capital provided by investors from the new bosses of the global economy, the cash-rich economies of Asia and the Middle East.

But perhaps worse for Merrill is the damage to its reputation.

To have been the market-leader in the business of converting sub-prime into CDOs is not a great brand.

Merrill and its peers said they were processing poison into healthy, wholesome investments for consumption by the banks and investment funds on which we all depend.

So confident was it in the nutritional value of this stuff, that it consumed super-sized portions itself.

Merrill and its clients are now feeling quite sick.

And having lost all that financial capital, the risk for Merrill is that its most valuable human capital – those of its execs untainted by sub-prime – will flee.

What are the implications for the rest of us?

Well unless Merrill and Citigroup have chronically overstated the collapse in value of CDOs and related investments, other banks and financial institutions will announce increased writedowns in coming weeks.

Which will further squeeze the capital available to finance economic activity – and reinforce an economic slowdown already in train.

That said, it’s an ill wind… But not for , the former chairman of the .

The current economic mess is laid by many at this door, for the way the Fed cut interest rates too much and held them down too long after 9/11.

And he was also a champion of the kind of financial innovation that fuelled the bubble in US sub-prime lending.

Anyway, a number of hedge funds have made a mint out of sub-prime lending.

The biggest winner has been the New York firm, , which is thought to have made $12bn in profits from the sub-prime meltdown.

And guess who has just become an adviser to Paulson? Yup, Mr Greenspan.

That’ll fuel a few mad conspiracies among the financial blogerati.

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