In the ongoing fessing-up process on Wall Street, Bank of America (NYSE: BAC) and JPMorgan Chase (NYSE: JPM) are expected to join the parade of firms disclosing write-downs on mortgage and leveraged loans. At an estimated $2 billion-plus for JPMorgan and $1 billion for Bank of America, the losses are certainly significant. However, for a $230 billion company like Bank of America, the losses are still relatively small, particularly when we look at some of the other firms that have been reporting.
For example, Merrill Lynch (NYSE: MER) has reported losses well in excess of $5 billion -- and that's quite significant for a $64 billion company.
As I mentioned previously, the market seemed to digest these huge losses in part because it had been preparing itself for them for a while now. And the market didn't seem to doubt that Merrill's changes were on the way -- the company's stock price dropped 19% between the firm's second-quarter earnings release and early August, even though Merrill beat analysts' Q2 earnings estimates.
So how was Merrill itself out of the loop here?
During the Q2 conference call, multiple references were made to the firm's "aggressive risk management" and hedging, yet there was not so much as a hint that massive losses loomed. This leaves two possible conclusions for me to take home: Either there were a bunch of nitwits in there handling the situation, or the company knowingly left us in the dark about what was going on. Neither makes me particularly sanguine about investing in the company.
Perhaps recent firings by Merrill and its CEO Stan O'Neal are meant to be a signal that that there were, in fact, said nitwits hiding out in high-ranking positions. "Not to worry," the folks behind these firings try to assure us, "the offending parties are gone now." Count me as incredulous.
An article in today's Wall Street Journal tells of O'Neal's ongoing work to transform Merrill into a savvier, more agile firm -- potentially one that would stack up better with competitors such as Goldman Sachs (NYSE: GS) and Lehman Brothers (NYSE: LEH). The disparity between the kind of results that Goldman produced for its recently announced third quarter and the loss that Merrill will take for its third quarter may highlight the reality that simply taking on more risk does not a winner make.
Some may look at Merrill's flub as simply a big, giant growing pain on the firm's path of transformation. Fine, I can live with that. What I can't live with is the market and investors having to guess that the firm will be taking big losses, rather than hearing it from the company itself.
While I single out Merrill here because it's the most glaring example, this isn't to say that other Wall Street firms have handled the recent situation any better. Second-quarter conference calls were littered with incarnations of the phrase "limited exposure," an assurance that many may have mistakenly taken to mean that the firms had limited exposure to troubled instruments. An estimated total $20 billion of losses suggests that "limited" was a severe understatement.
And despite the black eyes that many of these firms are taking right now, as well as assertions from the likes of Deutsche Bank (NYSE: DB) CEO Josef Ackermann that they're making efforts to be more transparent, I just don't see real movement in that direction. It seems that they all may be hoping to clench their teeth, take the lumps that are in order, and get back to business as usual.
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