MER: Pondering How Things Might Have Been Different

Invictus here.

I’m halfway through Greg Farrell’s Crash of the Titans: Greed, Hubris, the Fall of Merrill Lynch, and the Near-Collapse of Bank of America. Perhaps I’ll post a thorough review when I’m done with it. So far, so good, though I’ll confess it’s a bit like watching one’s own funeral — very morbid; sad memories of a deeply troubling time.

If there is one bone I will pick with Farrell’s work — and I was making this point about Stan O’Neal’s incompetence long before this book came out — it’s that he makes no mention of the fact that Merrill had a Chief North American Economist, David Rosenberg, who saw the housing bubble moving on to his radar screen, like a gathering storm, in August 2004.  Had Merrill heeded its economist’s advice, things would have turned out much differently.  The piece below is, I believe, the first in which he raised the specter of trouble on the horizon; many others followed in the same vein.  That O’Neal ignored his own chief economist and plowed ahead in the CDO market, in addition to buying subprime originator First Franklin in late 2006 at the absolute pinnacle of the market, shows three things:

1. O’Neal was an awful CEO, ignoring his own Institutional Investor top ranked economist and, according to Farrell, squashing any dissent by unceremoniously dismissing any employees who raised concerns about the direction the firm was taking (see:  Kronthal, Jeff, et. al.);

2. He was an incompetent risk manager, who never should have been running a BD.  And he relied on a similarly inept risk manager in Ahmass Fakahany;

3. The compensation structure in corporate America is a joke (admittedly not exactly breaking news).

But back to Rosie’s call. For those who have not seen it, below is his August 6 2004 Market Economist. Pages 5 – 14 are prescient, and that section on the housing market, with an assist to Ron Wexler, deserves a place in the Research Hall of Fame (along with only a handful of other calls in the entire history of research).  Parenthetically, it also puts the lie to comments made by then-CEA Chair Ben Bernanke at this presser in August 2005, in response to a question about the “housing bubble”:

There’s a lot of good news on housing. The rate of homeownership is at a record level, affordability still pretty good [Invictus:  The first half of the second sentence was true, the second half an outright fabrication]. The issue of the housing bubble is one that people have — whether there is a housing bubble is one that people have raised. Housing prices certainly have come up quite a bit. But I think it’s important to point out that house prices are being supported in very large part by very strong fundamentals.

Anyone who read Rosie’s piece (not saying Bernanke did) and came away thinking the housing market was trading on “very strong fundamentals” was, in short, delusional.  In retrospect, this report may have been the seminal work that propelled Rosie on to much greater (and deserved) recognition.

So grab a second cup of coffee and enjoy — it’s a quick read with some straightforward chartwork that even Stan O’Neal should have understood. (In my fantasy world, the one where CEOs and their co-conspirators are actually held accountable for their gross negligence and misdeeds (beyond being drummed out with $161MM parachutes), a document like this would be referred to as “Exhibit A”).


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