Merrill Lynch & Co. (MER) ended the fourth quarter with their largest loss, as they had to writedown $16.7 billion in subprime mortgage related assets. They ended the quarter with a record $9.83 billion net loss. Last year they had earnings of $2.35 billion for the same time period.
With the losses registering at a surprising three times larger than analysts expected, it caused the stock to drop by 10 percent in trading. It was their first loss over the period of an entire year since 1989, totalling $7.78 billion.
After calling the results "unacceptable," new CEO John Thain added that the company has to stop taking risks that have the potential to negate the profit generated.
That's the bottom line of the poor management in the financial companies hit by the subprime mortgage problems. They all got on the bandwagon and irrationally rolled the dice on them, only looking at the potential of the investments, and not the down side. In other words, they didn't manage the risk well, if it was managed at all.
In response to that, he installed a former risk manager at Goldman Sachs, Noel Donohoe, who will work with his counterpart Edmond Moriarty to manage risk at the company.
It simply confirms the need to be able to stand outside a situation and objectively look at it. The losses incurred by these financial giants show how easy it is to run with the herd when thinking someone's going to get ahead of you. As an old saying goes, "when the blind lead the blind, they both fall in the ditch." This has happened in an industry that should have known better.
I know we talk about it all the time at managersrealm, about keeping to the purpose and values of our companies, and this is a great case study in why we should. Another old saying goes, "stick with your knitting." Those old sayings remain with us for a reason. In these cases we need to follow them.
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