Yesterday’s missive — Rinse. Lather. Repeat — was, apparently, widely circulated. That’s according to a WSJ article Thain’s Housecleaning Spiffs Up Merrill (page C1).  (Glad to know that received wider attention).

Here’s the excerpt:

"Rinse, lather and repeat," began an email by Barry Ritholtz, director of equity research at Fusion IQ, that circulated widely Tuesday and summed up the predicament facing Mr. Thain. "Release earnings. Issue guidance. A few weeks later, lower earnings. A few weeks after that, take more write-downs. Raise more capital. Start it all over again next quarter," Mr. Ritholtz wrote.

A separate email, not from Mr. Ritholtz, dredged up nine examples of Mr. Thain suggesting as far back as December he was comfortable with the amount of capital Merrill had amassed. In an interview 47 days into the job, Mr. Thain said that problems in Merrill’s mortgage-related holdings were "for the most part behind us."

Mr. Thain has since acknowledged his disappointment with the continued deterioration of the firm’s mortgage holdings.

The article goes on to make a number of other interesting points — that "Predicting the market’s bottom has flummoxed smart people up and down Wall Street." 

Here’s the issue that made me see red on Monday night:

It isn’t clear why Mr. Thain decided it was time to cut Merrill’s losses. Before Monday’s announcement, Merrill had raised more than $15 billion through various common- and preferred-share issues. On July 17, when Merrill posted a $4.65 billon quarterly loss, it announced it was selling assets, including its 20% stake in Bloomberg LP for nearly $4.5 billion.

Investors didn’t know at the time that Merrill was negotiating with Lone Star Funds, the Texas private-equity concern, to sell CDOs with a face value of $30.6 billion, according to a person familiar with the matter.

I find it difficult to reconcile the earnings announcement with the transaction 10 days later . . .


Rinse. Lather. Repeat.  (July 2008) 

Merrill’s $5.7B Write-Down, $8.5B Share Issuance  (July 2008) 

Thain’s Housecleaning Spiffs Up Merrill
Shares Increase  On Capital Raising, Mortgage-Asset Sale
WSJ, July 30, 2008; Page C1

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Discussions found on the web:
  1. Vermont Trader commented on Jul 30

    I’m still pissed that Thain got rid of early closes before holidays at the NYSE.

    What a jerk.

  2. Ecklebob commented on Jul 30

    Barry, Thains’ leadership is based upon one indictable offense after another. Why aren’t the big block shareholders not suing MER to Hell and back? They know that “profit” going forward is going to deflate this overpriced penny stock. Hilarious Hank and his Traveling Financial Medicine Show must be envious that Thains’ ability to lie, cheat and steal exceeds even their ability.

  3. Scott Frew commented on Jul 30

    As Bill Fleckenstein, talking about what Mr. Thain knew, and when he knew it, said last night, wouldn’t it be nice if there were some sort of agency charged with making certain that publicly traded companies didn’t simply lie all the time about their financial circumstances and prospects. We’ve got that agency–forget the name–that’s in charge of stopping naked short selling, and rumor-mongering by the shorts. Maybe we could expand its portfolio, and it could police publicly traded companies as well.

  4. Spooky commented on Jul 30

    Yes its disgusting. From shady investor communications to preferential rule treatement from SEC its clear (at least to me) that the gang of 19 clearly operate on a different set of rules from the rest of the market.

    It will be interesting if there are no class action lawsuits following suit here. I think we can all agree that if your average company did this there would certainly be lawsuits.

  5. DownSouth commented on Jul 30

    “Why aren’t the big block shareholders not suing MER to Hell and back? “–Posted by: Ecklebob

    Ecklebob, the only thing I can figure out is that the major investors are pension funds and other entities that use OPM, and therefore they really don’t give a rat’s ass.

  6. larster commented on Jul 30

    We had the strongest financial markets in the world due to trust and transparency. At what time does the gov (treasury and SEC) take action to preserve this reputation, if this is possible. Actions like Merrill’s, are tearing our finacial reputation down brick by brick. Manufacturing has basically been outsourced. Are financials next?

  7. edhopper commented on Jul 30

    What’s so hard to reconcile, Barry? It’s called stock fraud. Think Ken Lay and Enron.

  8. Jdamon commented on Jul 30

    Somewhat off-topic, but when I read all these posts that rail against longs and what they do vs shorts, everyone seems to be missing a big point. 99% of the retirement/pension plans in the US are invested in either the US or overseas equity markets. The US has a huge incentive to keep the markets moving in a general upwards direction over the long-term or almost all these plans will have to slash benefits/raise contributions and we all know the sh*t will hit the fan if anyone requires the baby boomers to slash their expected benefits. While I am baiscally neutral the market right now, I don’t honestly think I’m going to grow my retirement funds significantly by shorting selected equities. Shorts are definitely playing havoc with the entire retirement system as we know it.

  9. Jeff commented on Jul 30

    This may sound like a dumb question (and obvious answer) – but since the feds seem to have taken the “moral hazard” theme to a new shameful level when it comes to doing everything that it can to back the financials (many of which, are obviously insolvent already), is SKF merely a sucker’s play (since financials seem to have to implicit backing of our gov’t as “too big to fail”) or are they just delaying the inevitable downward spiral in these companies by seemingly propping them for as long as they can? For investors in SKF, it seems like the house has stacked the deck against them, which to me, makes it seem like a fool’s errand to buy that ETF, at least right now.

  10. mhm commented on Jul 30

    In defense of Mr Thain, a CEO is not an all knowing god. He depends on reports from the hierarchy all the way down to the mail room. I’m not saying he is clear, just that he may not be the evil mastermind.

    My brother was named country CEO of a major enterprise to try and rescue it (unnamed company and country). One year later and no matter how many major deals closed profitably, the auditing from previous administration brought so much shit up that there was no future. The solution was to break up, sell some parts, close the rest and forget it.

  11. Stuart commented on Jul 30

    FASB postpones off balance rules for an additional year. FED extends lending duration. SEC “fortressizes” a double standard for the banks and Congress bails out FRE and FNM, ….. everything but the kitchen sink being thrown by financial and political leadership aimed at maximum moral hazard decay. How far we have fallen.

    Little wonder the XLF is bouncing. When the feed trough at the hen house is guarded by the fox, pigs feel safe. We’re the hens.

  12. Jeff commented on Jul 30

    @mhm: You make a fair point that the CEO can’t possibly “know all”, but it’s his JOB to hire the right people (I’m sure he’s brought in his own people, right?) to get the mess cleaned up and to give it to him straight. Now either his “own people” aren’t giving it to him straight or are giving it to him straight, and he’s not giving it to us straight. Also, Thain was paid quite a bit of dough to come in as the “know-all” “savior” and clean up the mess at Merrill. Now if he (even though it’s not him DOING all of the “fixing”, we know that) comes in and straightens things out, HE gets basically ALL of the credit (via media sychophants and absurd pay), right? So, in my book, the reverse should be true – if the company fails when he’s at the helm, he HAS to get ALL or most of the blame. Sorry, but these arrogant, me-first/last/always can’t have it both ways – they’re all too happy to take the money, fame, and adjulation when times are good for their companies, but will not accept ANY blame or negative PR when they’re bad on his/her watch. To me, that’s a big part of what’s rotting Corporate America and this country to the core – lack of accountability by leadership for any mis-steps.

  13. fero commented on Jul 30

    big fan of the blog barry, truly the best of breed

    i agree with all you are saying, but let’s also put some weight on the fact that MER is finally selling loosing positions as opposed to just writing them down and hoping they will bounce back .. this is the first real step leading toward eventual recovery in the space

  14. VennData commented on Jul 30

    Look for those shrill, meddlesome do-gooders in gov’t to put warning labels on every share of XLF.

    The modern American CEOs’ comp. deals are like CDO’s: they’re black boxes of messy incentives that don’t have much to do with the underlying value of what they’re supposed to be valuing (they aren’t aligned with investors, but have lots to do with making the glass-tower occupiers money.)

    What to do?

    I say we borrow from Holman Jenkins’ “destroy the village to save it” public policy idea (to destroy unoccupied housing to “raise” house prices back to where they “should” be – repeated again in today’s WSJ) and apply it to CEO’s black-box pay packages.

    Oh sorry, that would be interfering with the market. I’m open to suggestions.

  15. mhm commented on Jul 30

    Jeff, the point is that people that made bad deals and are still at the company won’t came to you and confess it. The auditors have to dig it up and I can only imagine the hell it must be to do it in a financial company these days.

    The new CEO is not responsible in any way for previous wrongdoing. He is responsible for cleaning it up the best he can, if possible.

    The auditors can bring it up in timely chunks and the CEO can claim s/he didn’t know it before. And if that is questionable so be it. Otherwise, a full disclosure at a bad time can implode the company and possibly the whole market. Damned if you, damned if you don’t…

    CEOs get a good money (excessive sometimes in the USA) but it is a hard job.

  16. Mel commented on Jul 30

    Congrats to Barry, even the WSJ admits it needs to read and digest your work. The sad part of that is you do this part time–you do have a day job, the reporters should be your source, not v.v.

    I read blogs more than newspapers lately–and feel better informed. Maybe not all the fiscal distress of the press is due to the electronic media, maybe they’ve just become stenographers–and that is useless with the internets being faster and more complete.

  17. Mel commented on Jul 30

    Congrats to Barry, even the WSJ admits it needs to read and digest your work. The sad part of that is you do this part time–you do have a day job, the reporters should be your source, not v.v.

    I read blogs more than newspapers lately–and feel better informed. Maybe not all the fiscal distress of the press is due to the electronic media, maybe they’ve just become stenographers–and that is useless with the internets being faster and more complete.

  18. Jeff commented on Jul 30

    mhm: If after 8 months on the job, Thain still doesn’t have a handle on what’s going on at Merrill, then it’s time to break up the firm.

    Also, if he doesn’t have a good handle on what’s going on, then shouldn’t he stop making public statements about the health of the firm that later turn out to be patently false? Is that too much to ask? It does not inspire credibility (which is HUGE component of a CEO’s job, right?) confidence that he knows what’s going on OR is knows and is hiding something (big shock there).

  19. Pete commented on Jul 30

    Thanks for pointing out this fraud ( yet another one of many ).

  20. mhm commented on Jul 30

    Jeff, credibility can work in twisted ways.

    Again, I’m not defending him or any CEO: they are accountable for _their_ actions. If you feel you can do a better job, send a resume and references to MER.

    I’m off now and my apologies if it went a bit off-topic.

  21. Jeff commented on Jul 30

    mhm; Whether or not I “feel I can do a better job” is not even the point though, is it? I’m NOT in the job (nor do I WANT the job or am I qualified for the job). The point is this man gets paid a lot of money to DO THE JOB and do it well, and in my estimation, he’s doing it poorly, especially from a credibility-standpoint. Did he inherit a mess at Merrill? Sure, but he TOOK the job (and the outsized pay package that came with it) to clean it up. A leader cannot continually make false statements and inspire confidence that he knows what he’s doing (see GWB). That’s all I’m saying. He needs to be more careful about what he says publicly about the firm if he’s not sure what is going on.

    I’m sure if/when the mess gets cleaned up (with some big help from the Feds), Mr. Thain will be hailed as a “genius” and “hero” who can do no wrong by the adoring media and he’ll be given ALL of the credit. Gotta take the good AND the bad or else it’s all just nonsense (and maybe is nonsense either way).

  22. hal commented on Jul 30

    when the lawsuits start-and well they should–what is the renumeration?

    make me “whole” since MER was a $70 stock last October -based on the lies and misrepresentations?

    How about the rest of the bank BS?

    After they possibly write sown what they say is good, the (mega billion) lawsuits will finish them off.

  23. tomd commented on Jul 30

    Re SKF, it’s for trading, not “investing” as someone asked earlier. And what a wonderful trading vehicle it has been over the last year.


  24. stuart commented on Jul 30

    Spiffy for sure. Great comments from Jesse’s crossroads blog. Just spiffy.

    “Just How Accurate is the ADP Payroll Report?

    We somewhat foolishly assumed that the monthly ADP employment report was based on actual data from the business sector on jobs additions, merely excluding the government sector, but a good “hard data” source indicative of the Non-Farm Payrolls Report.

    We have this piece of information in an email from a capital asset fund manager:

    “I just called an economist at MacroEconomic Advisors, the local St. Louis firm that compiles the monthly ADP (private) employment data which was reported today for the month of July. Please keep in mind that this firm has ties to former St. Louis Fed Governor Laurence Meyer. The statistic was a “shocking” +9000 JOB GAIN!!! This promptly pushed the equity futures market (and U.S. dollar) sharply higher at 8:15EDT. The DJIA after a half hour of trading is up 122 pts.

    Now, are you sitting down? A component of this very suspicious report showed that Financial firms INCREASED employment by +4000 jobs. I promptly told this “economist” that there was no way in God’s Green Earth that banks, brokerages, mortgage companies, and any other financial institutions had increased employment by 4000 jobs in July. He candidly told me that the firm had probably overestimated that sector for many months. Upon hearing that, I asked him why they don’t change their methodology in compiling their data? He indicated that they were doing that but that it was a “monumental task!”

    So, we have a sharp rally this morning in the equity market and U.S. dollar, based on data that even the reporting firm questions. I think we’ve seen it all!”

    No we have seen it all yet. But we’re on our way.

    The rally is frivolous.

    The market was predisposed to rally however, otherwise it would not have. It was looking for an excuse, since the fund managers must have their bonuses, and hot money must be consumed by mispriced beta.

    To give it a ‘little credit’ it was not so much the huge miss from real growth; optimists are grasping at straws looking for a turn, a bottom. Some may be sincere in their hopes, like I suspect some of the financial media may be. Who wouldn’t?

    But we are watching people who are most likely about to lose real money, with real consequences, based on a system with too little in the way of integrity.”

  25. Scott Thompson commented on Jul 30

    If one accepts the definition that a Fascist state is one run of, by, and for business, then one must conclude that the United States of America is, in fact, fascist. Now I’d say that pretty much sucks the big one, but there it is. Anyone think the WWII generation went through what they went through to bring about that result? I’m compelled to return to the idea that Milton Friedman got most things just about bassackwards, and certainly wrong. I know this because CNBC cheerleaders Dennis and Michelle had a What Would Milton Do? segment today. CNBC reached an all-time high in douche-baggery on that one! The weird deification of an economist (proven horribly flawed at best by recent government malfeasance in the regulatory arena by a couple of wags on what is alleged to be a business “news” channel) was a surprise even to this skeptical curmudgeon…

  26. JC commented on Jul 30

    Has it ocurred to anyone that MERhad to do stock issuance because they raised very little cash from the asset sales? Only $1.5B from Texas and they financed Bloomberg, maybe not much cash there.

    Also what about the cash flow from $30B (nominal) of bonds? At 5% that would be $1.5B (not including repayment of principal). Somebody must be paying their mortgages, where is all that cash going? None to the bond holders?

  27. Jack Forette commented on Jul 31

    Toot!! Toot !! There goes Barry tooting his own horn again. We get it Barry. You are influential and people like you. You don’t have to mention every time you are mentioned in ink or on TV. Very unprofessional and shows lack of class. Again.

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