Anatomy of the Merrill Lynch Crisis

At first glance, the upheaval at Merrill Lynch seemed to be a straightforward story of a financial market gone bad, damaging one of the large investment houses that had too much exposure in that market, and forcing the retirement of its chief executive officer.

At first glance, the upheaval at Merrill Lynch seemed to be a straightforward story of a financial market gone bad, damaging one of the large investment houses that had too much exposure in that market, and forcing the retirement of its chief executive officer. At closer range, though, the turmoil at Merrill is a complex tale marked by that CEO's less-than-candid communication with the company's stakeholders, the loss of investor confidence, and the threat of government action.

We traced the evolution of the story in more than 80 major outlets between October 24 and November 1, 2007, cataloguing key events, analyzing the tone of the coverage, and tracking the stock price.

Wednesday, October 24

Merrill Lynch announced it was taking a $7.9 billion write-down due to exposure to collateralized debt obligations and defaulting sub-prime mortgages. The company also reported a $2.24 billion loss. The write-down was $2.9 billion higher than Merrill's original estimate, and is described as “the biggest known loss in Wall Street history.”

CEO E. Stanley O'Neil presented the larger figure as the result of Merrill's “additional analysis,” based on more “conservative assumptions.” Additional statements made during the third-quarter conference call with the press, however, were reported as producing more questions than answers regarding the company's risk management practices and the degree of future uncertainty.

The company's stock closed at a two-year low of $63.22, down $3.90 (about 6%) from the previous day.

There was no positive coverage in the press. An analysis of the next day's coverage in top-tier media showed that 30% of the articles were somewhat negative, 25% were mostly negative, and the remaining 45% were completely negative.

Thursday, October 25

News coverage focused on the market's uncertainty regarding Merrill's approach to risk management and risk control, and analysts forecasted further losses. A new wrinkle emerged: The New York Times was among the first top-tier publications to report that CEO O'Neal had approached Wachovia, a major banking institution, regarding a possible merger – but that he did so without the knowledge of Merrill Lynch's board. This breach of corporate protocol alone could have led to O'Neal's ouster.

The stock closed at $60.90, down $2.32 (nearly 4%) from the previous day.

Coverage remained universally negative. Analysis of the next day's coverage in top-tier media showed that 33% of the articles were somewhat negative, 33% were mostly negative, and 33% were completely negative.

Monday, October 29

News coverage brightened slightly on reports that Mr. O'Neal was on the verge of resigning (his retirement was in fact announced the following day). The market's optimism stemmed from the prospect of new leadership.

The stock closed at $67.42, up $1.33 (nearly 2%) from the previous Friday.

The tone of the news coverage ticked up slightly. An analysis of the next day's top-tier media articles showed that 10% of the stories were neutral, 40% were somewhat negative, 25% were mostly negative, and 25% were completely negative.

Friday November 2, plus weekend coverage (November 3 and 4)

Top-tier media sources ran a torrent of negative stories. The Wall Street Journal reported Merrill Lynch had reached agreements with certain hedge funds, which may have been intended to delay disclosure of its exposure to risky mortgage-backed securities. The matter was reportedly under investigation by the Securities and Exchange Commission. Some analysts said they expected further write-downs, with some estimates as high as an additional $10 billion. Finally, there were reports that Mr. O'Neal's pricy severance package (reportedly worth more than $160 million) might revive Congressional efforts to give shareholders more involvement in establishing CEO compensation.

On Friday, the company's stock closed at $57.28, down $4.91 (or 8%) from the previous day.

During this ten-day period, Merrill's stock dropped 15 percent, as compared to a .05 percent loss in the Dow during that same period.

The tone of the coverage reached new lows. An analysis of the weekend's coverage in top-tier media articles showed that 20% of the stories were somewhat negative, 30% were mostly negative, and 50% were completely negative.

Submitted by BurrellesLuce. Report based on analysis of over 110 top-tier media articles appearing between Thursday, October 25 and Sunday, November 4.

The New York Times, Sunday November 4, 2007; “Where Did The Buck Stop At Merrill” by Graham Bowley and Jenny Anderson. Section 3, Page 1.

The International Tribune, Thursday October 25; “Write-down by Merrill grows to $7.9 billion; Total is highest ever for Wall Street firms; shake-up is expected” by Jenny Anderson and Landon Thomas Jr., The New York Times Media Group, Page 1.

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