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”).


Category: Research

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

20 Responses to “MER: Pondering How Things Might Have Been Different”

  1. Thanks for this, Invictus. O’Neal is one of the great villains in this passion play called Bailout America. More ignorant than venal, he still is a bad guy who got away with $100s of millions.

    And while I knew you were at MER under O’Neal, readers did not. I appreciate you letting the cat out of the bag — but I hope it doesn’t get you into hot water with your new boss . . .

  2. ToNYC says:

    From the perspective of just a broker to the stars, it was clear that O’Neal was not much more than a spanner thrown into the ex-Marine, Irish Catholic old boys network that never broke ranks. Not to diminish the great straight-shooter David Rosenberg in any way for he had all the evidence and prosecuted to convict, but both he and the Fed both shared the historical then best bet that higher interest rates for end the game. The paradigm of 2004 perfectly eliminated the collective social contract that the get-rich-quick and for nothing scheme would be seen as fraudulent intent.

  3. VennData says:

    “…Had Merrill heeded its economist’s advice, things would have turned out much differently…”

    Who are the GOP listening to when they threaten to kill a brilliant Build America Bonds program? And turning teh Muni bond market upside down?

    Oh, that’s right, it’s anything that Obama did must be killed, de-funded, or staffed morons like Christopher Cox. Why, the GOP is even willing to play with thermo nuclear weapons.

    This is party who claims to want Dems to “reach across the aisle.” They are not patriotic, they are idioitic.

    But it’s the exact same thing they did to Clinton, why should we expect anything less?

  4. machinehead says:

    So Barry worked for the Thundering Herd, huh?

    Good thing he escaped — I can’t imagine a worse fate than working in a division of the pea-brained, insolvent dinosaur Bank of America.

    Make that ‘Exhibit A for the prosecution’ …

  5. StatArb says:

    Merrill did the same with Christine Callies .
    Bad news to report ? ? ? ? . . . “you’re fired “

  6. MacroEconomist says:


    It’s all about Point #3.

    Stan O’Neal got a $161.5m Golden Parachute. He made $50m in 2006 alone.

    I would have done the same thing given the incentives. F*ck em’all.

    Even today, I still think the same man. I just need 3 good years, 3 good years!

    Nothing has changed, this is a useless freaking business we’re in and you are one of the few who truly adds value and does it because he loves it.

    P.S. Stan O’Neal has told Rosie privately that he should have listened to him…

  7. gordo365 says:

    I’m being lazy – is there another way to access and print full report without allowing Scribed full access to all my facebook info including contacts and friends lists etc.?

  8. ben22 says:

    sort of amazing how pretty much every time Invictus does a post someone has to say something like:

    “So Barry worked for the Thundering Herd, huh?”

    Maybe you guys need to make the author font bigger than the headline font……

  9. oracle3 says:

    Not to throw a piece of cow dung into the vichy sous but I used Rosenberg ten or so years ago for my clients and he lost everything. The “call” he made six years ago is not something I’d place all clients in, too far in advance and one that any amateur might make too.

  10. ewmayer says:

    Problem for Rosie back in 2004 was that, in true Cassandra-like fashion, he was right but premature … for the next 2+ years the housing bulls were laughing at “the perma-bears” like him.

    Same thing the “Don’t fight the Fed … Dow to 36000…it’s a new bull market, baby, and it don`t need no stinking ‘jobs recovery’” crowd has been doing since the markets bottomed (whether temporarily or for the long-term remains to be seen) in early 2008.

    BTW, I love it when the above cheerleading herd pulls out the old “if you listened to so-and-so you missed a huge 80% rally” canard as an alleged argument-ender. Uh, no – you only caught that 80% if you were all in cash and then bought precisely at the bottom. From the mere inverse-pointed shape of the bottom it’s clear that very few did, for the obvious reason that – unlike historic asset bubbles as they form – historic market tops and bottoms are easier to spot in retrospect than in real-time. I suspect for most of the permabulls the 80% rally merely helped them erase a good chunk of the massive losses they suffered in 2008. For anyone who wants to claim to have bought big near the bottom – provide a screenshot of your trading records from March 2008 (feel free to crop the more-sensitive personal data out) or STFU.

    Of course plenty of perm-bears got slaughtered in the latter 9 months of 2009, but that was less for getting the fundamentals wrong than it was for underestimating the reflexive nature of markets, the power of many vested interests in keeping the Great American Ponzi scam going, and an unprecedented level of government-orchestrated market involvement and outright fraud. (Suspension of M2M accouting rules … Failure to take the legally-required prompt corrective action insolvent banks by the FDIC … the Fed buying-on-undisclosed-terms and holding trillions in securities lacking the required “full faith an credit of the U.S. government” … the Fed making a mockery of the latter by continually debasing the currency in an ill-advised effort to refloat the insolvent banks, under the guise of “stimulating the economy by encouraging lending” … the list goes on, and on, and on. Barry R. mentioned numerous other biggies in his recent “Dear Uncle Sucker” parody of Warren Buffett`s self-serving NYT op-ed).

  11. ewmayer says:

    Corrigendum: Last part of para. 2 should read “…in early 2009″.

  12. ToNYC says:

    Just saying “Not to throw…” while throwing does not elude this cognitive dissonance meter. When you “used Rosenberg for my clients…”, Charles was in charge and it was actually you that lost your client’s everything. He made his call at that time and I’m certain that an amateur wouldn’t have reached the eyeballs that read the Chief North American Economist of Merrill Lynch. You place your clients; you own the results, Sir. The blame is yours no matter who and how you skewer it and it diminishes your present and future value not owning your FAIL.

  13. [...] Things could have turned out different for Merrill Lynch if management had only listened to its own [...]

  14. DeDude says:

    MacroEconomist, has it right; it’s all about he absurd and counterproductive incentives on Wall Street. Everybody thinks: “I just need 3 good years” (and then I can stop working for the rest of my life). This is only possible because the compensation in the rent seeker business is so absurdly overblown. O’Neal ignored or fired those who said the things that could lower his compensation for the next few years, because the incentives did not force him to bother thinking about the long-term future of the company. In contrast to his shareholders he came out just fine, didn’t he?All the mom&pop investors, teacher/firemen/police officers pension funds, and index fund investors – they lost money; but O’Neal got away with a huge sum.

  15. ToNYC says:

    O’Neal was placed to be powerless as the Steal went down. Exactly who put him there knowing the likely outcome might be closer to the reason DR was D/K’d…or things happen, but not often enough for the reasons you think.

  16. DeDude says:

    If boards and compensation committees had fiduciary duty to shareholders, they would all be in jail.

  17. Ltdata says:

    Awesome. While the charts don’t say “when” a change will occur (economics is an inexact science), they do say stop, look and think.

  18. plantseeds says:

    BOD has fiduciary duty of care and of loyalty to the corporation and shareholders. Duty of care is responsibility is to perform duties with the diligence of a reasonable person in similar circumstances. Duty of loyalty is a director’s fiduciary duty is to act in good faith for the best interests of the corporation.
    Too much money being passed around to start locking people up. Plus you can’t put these guys in jail… there are criminals in there!

  19. ToNYC says:

    In an unjust society, the criminals own the jail; the failures are paying the rent to those with forgotten crimes.

  20. [...] How things might have been different at Merrill if they had listened to David Rosenberg.  (Big Picture) [...]