Merrill’s Heroes

Invictus here.

BR’s comments yesterday, plus some unfortunate softball media coverage, led me to today’s rant. There are few things in the world that annoy me more than revisionist history, especially when it’s done to burnish one’s own damaged legacy.

To make a George Bush/Osama bin Laden analogy,  I don’t think that much about Merrill Lynch’s former co-president Ahmass Fakahany. In fact, I had no reason to ever again contemplate His Arrogance again until the NY Times shoved a story about him in front of my face Sunday. (This might be a little inside baseball for those of you who do not work on Wall Street, but Fakahany was the top lieutenant to disgraced former Merrill CEO Stan O’Neal.)

So now he’s a restaurateur. Like anyone should care a flying #$%&. The NYC Dept. of Health better hope he’s more adept at running restaurants than he was at running Merrill.

Still, I could have skimmed through the story without incident, wished him the worst, and called it a day. But no, he had to interject that “There are no heroes in the Merrill story.” Such a blatant, egregious, self-serving lie simply must not go unchallenged.

Here’s how Forbes pre-futes (can I claim coinage on that one?) Mr. Fakahany’s claim (emphasis throughout added):

To reassure Merrill loyalists, Thain called back fixed-income adviser Jeffrey Kronthal, who had been purged in 2006 for opposing O’Neal’s swan dive into subprime mortgages.
(emphasis added)

And here’s how the Journal wrote the story when he returned:

Mr. Kronthal, 53 years old, received a standing ovation when he appeared on a Merrill trading floor yesterday, people at the firm said.

More on Kronthal’s departure, and Fakahany’s world-class ineptitude, can be found here.

Another potential hero might have been John Breit, who apparently had a crystal clear understanding of how the firm was in the process of being driven into a ditch. From the link immediately above:

In early 2005, Fakahany decided to push the risk management function down a notch further. He promoted the executive who was head of credit risk to be a kind of risk czar, to whom all the other risk managers would now have to report, instead of to Fakahany directly. Furious at what he saw as the degradation of the risk function, Breit sent Merrill’s CFO, Jeff Edwards, a letter of resignation and he left the firm. (emphasis added)

Another potential hero in the saga was Merrill’s North American Chief Economist, Dave Rosenberg, who had begun (circa 2004) writing about a housing bubble — and was immediately chastised, admonished, and somewhat marginalized for doing so. I’ve posted and linked to this piece numerous times, but here it is again.

Housing: If Not a Bubble Then an Oversized Sud

In this report, we assess the likelihood that the housing market has entered into a “bubble” phase. There are numerous shades of gray, but when we examine the classic characteristics of a bubble (extended valuation, over-ownership, excessive leverage, a surge in supply, complacency (denial?), and speculative behavior, it seems to fit the bill).

Check. Check. Check. Check. Check. And check. A perfect six-for-six.

And what did Mr. Fakahany and his boss do with this insightful commentary from their chief economist, the concerns coming from Mr. Breit, Mr. Kronthal, et. al.? They went out — at the very peak of the mortgage madness — and bought themselves a subprime mortgage origination firm (at an absurd premium, I might add). This was, quite literally, the ultimate top-tick in the housing market – the equivalent of a retail investor’s decision to overweight technology in March 2000 because we were in a “new paradigm”:

“Toward the end of 2006, Merrill Lynch took a final step in its ongoing quest to be the dominant Wall Street player in subprime mortgages. It finally bought that mortgage originator O’Neal had been hankering for. The company was First Franklin, a unit of National City Corporation that had made $29 billion in mortgage loans the year before, virtually all of them subprime. The purchase price was $1.3 billion. Now Merrill would have its own source of mortgages that it could securitize to its heart’s content. Or so the company hoped.”

Kronthal and his crew were dismissed. Breit “resigned.” Others were terminated. Rosenberg’s commentary was occasionally tempered or diluted and he was fairly well ostracized, deliberately distanced from management types who needed to know his thinking. There are many, many others, I’m sure, and I apologize for not mentioning them by name. I know you’re out there.

I could go on and on, but to what end?

Mr. Fakahany, spare the world your bullshit “no heroes” narrative (indicative of still being in the “denial” phase). Accept the fact that you and a small group of cronies drove one of the best, most-recognized, most admired brand names the world had ever seen right to the brink of bankruptcy despite more than ample warning about what you were doing.

You need to take a page from Ray Dalio’s book, and do some deep self-reflection. Recognize the errors you made, own up to your own managerial incompetence. ‘Fess up.

Merrill had — and, frankly, still has — many good people who are deeply committed to the betterment of the firm, your fantastical narrative notwithstanding.

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Excellent further reading:

All the Devils Are Here: The Hidden History of the Financial Crisis Bethany McLean & Joe Nocera

Crash of the Titans: Greed, Hubris, the Fall of Merrill Lynch, and the Near-Collapse of Bank of America Greg Farrell

Win Smith’s speech at the MER/BAC shareholder vote on BAC’s acquisition