Merrill Reports A Total Of $41 Billion In Losses. What Does The Future Hold For Merrill And Wall Street?
To date, Merrill Lynch's losses have been massive. Before this mess Merrill was reporting about $4 billion in annual revenue. That is ten times annual revenue in losses. And, today they are reporting negative revenue. Only in the OPM (other people's money) or banking business could a company lose ten times revenue and still be in business. Were GM to lose ten times revenue, they would be reporting $2 trillion in losses. Think they'd be in business? At least GM's business model is sustainable.
The New York Times reports today, "The magnitude of the problems seems to have caught Mr. Thain (CEO) by surprise. Just a few months ago he assured investors that Merrill did not need to raise more capital. “We’re very confident that we have the capital base now that we need to go forward in 2008,” he said in January."
This company has completely lost its way. Charles Merrill was one of few on Wall Street who warned his clients of impending doom well before the 1929 crash. Can you imagine that happening today? A time when banks and financial firms make hundreds of billions annually by telling us to hold through crises so they can collect their money management fees. The fox is guarding your hen house. Charles Merrill built a business on customer satisfaction. What is at the heart of customer satisfaction? Trust. The main street American investor is what built Merrill. Where is the main street investor in Merrill's current incarnation? Well, I have an opinion but I will just say that most banks and financial firms figured out how to make money without doing a whole lot of worrying about their clients. Merrill and others now use client investments to trade against its most cherished assets (clients) in the markets. Clients taking it on the chin by high oil prices? Who cares. Wall Street is minting money trading oil as it rises into the stratosphere.
How is Merrill going to make money on a forward basis? What is its sustainable business model? Why is no one asking this question? It is the primary question facing all of Wall Street. I'll tell you why no one is asking. First, the OPM business is not highly populated with people that actually know how to manage a business. If that is the case, what's the chance they even realize there is a problem with their business model? Instead Wall Street is more highly populated with people that know how to raise money. That is their business. It is an important business when it comes to playing a support role for the economy. In every other incarnation other than supporting the economy, this business model is completely expendable and is at risk of being destroyed by market forces. I really think people need to think about this.
As long as Wall Street is raising capital, the fees are good and business is good. Now that a problem exists with raising capital, Wall Street is left to fix its business problems. Yet, there is a valid perspective that isn't something Wall Street is actually qualified to do. That is, unless they can figure out how to start raising substantial sums of capital on a sustainable basis. Then they'll be fine with the status quo. Uh, who am I kidding. So, what am I saying? They will learn how to fix their businesses because the market is going to make them. And, that is going to be a painful process. Merrill's new CEO seemingly believes future riches lie in today's business model. Merrill's business model is broken and so is Wall Street. Yet nary a person utters said fact.
Fixing Merrill requires a very different set of skills than dressing up the NYSE to bring it public. I don't see any experience in Thain's background that qualifies him for the task at hand. And, mind you, he is being paid at a level of being one of the top CEOs on the planet. Merrill shareholders ought to feel good about this fact. Lack of experience doesn't mean he won't be successful but Thain is going to have to take very large risks on decisions he has little experience with in order to return Merrill to long term viability. He is likely going to have to shut down many of the engines of profit growth Merrill relied on in the last ten years or more and he is going to have to find new engines of profit at the same time. If he doesn't do it, there's a very good chance the market will do it for him. The difference is simple. Is it easier to deal with change when it is voluntarily and on your own terms by embracing it or when it is forced upon you? The answer is right in front of us. Wall Street is being grudgingly forced to change as I write this. How painful has it been and will it yet become? In a great bout of irony, Wall Street has ruthlessly extracted change in the American economy that is now leading to its very demise. Wall Street is imploding due to self-inflicted causes.
CEOs put their pants on one leg at a time just like you do. There is no magical CEO bullets in business. It's common sense, hard work and luck. Businesses face the same issues of balancing their checkbooks as we do. Merrill Lynch needs to find a way to balance its check book and to create enough positive income in the future to sustain its itself or risk the same demise as everyone else in this economy.
The New York Times reports today, "The magnitude of the problems seems to have caught Mr. Thain (CEO) by surprise. Just a few months ago he assured investors that Merrill did not need to raise more capital. “We’re very confident that we have the capital base now that we need to go forward in 2008,” he said in January."
This company has completely lost its way. Charles Merrill was one of few on Wall Street who warned his clients of impending doom well before the 1929 crash. Can you imagine that happening today? A time when banks and financial firms make hundreds of billions annually by telling us to hold through crises so they can collect their money management fees. The fox is guarding your hen house. Charles Merrill built a business on customer satisfaction. What is at the heart of customer satisfaction? Trust. The main street American investor is what built Merrill. Where is the main street investor in Merrill's current incarnation? Well, I have an opinion but I will just say that most banks and financial firms figured out how to make money without doing a whole lot of worrying about their clients. Merrill and others now use client investments to trade against its most cherished assets (clients) in the markets. Clients taking it on the chin by high oil prices? Who cares. Wall Street is minting money trading oil as it rises into the stratosphere.
How is Merrill going to make money on a forward basis? What is its sustainable business model? Why is no one asking this question? It is the primary question facing all of Wall Street. I'll tell you why no one is asking. First, the OPM business is not highly populated with people that actually know how to manage a business. If that is the case, what's the chance they even realize there is a problem with their business model? Instead Wall Street is more highly populated with people that know how to raise money. That is their business. It is an important business when it comes to playing a support role for the economy. In every other incarnation other than supporting the economy, this business model is completely expendable and is at risk of being destroyed by market forces. I really think people need to think about this.
As long as Wall Street is raising capital, the fees are good and business is good. Now that a problem exists with raising capital, Wall Street is left to fix its business problems. Yet, there is a valid perspective that isn't something Wall Street is actually qualified to do. That is, unless they can figure out how to start raising substantial sums of capital on a sustainable basis. Then they'll be fine with the status quo. Uh, who am I kidding. So, what am I saying? They will learn how to fix their businesses because the market is going to make them. And, that is going to be a painful process. Merrill's new CEO seemingly believes future riches lie in today's business model. Merrill's business model is broken and so is Wall Street. Yet nary a person utters said fact.
Fixing Merrill requires a very different set of skills than dressing up the NYSE to bring it public. I don't see any experience in Thain's background that qualifies him for the task at hand. And, mind you, he is being paid at a level of being one of the top CEOs on the planet. Merrill shareholders ought to feel good about this fact. Lack of experience doesn't mean he won't be successful but Thain is going to have to take very large risks on decisions he has little experience with in order to return Merrill to long term viability. He is likely going to have to shut down many of the engines of profit growth Merrill relied on in the last ten years or more and he is going to have to find new engines of profit at the same time. If he doesn't do it, there's a very good chance the market will do it for him. The difference is simple. Is it easier to deal with change when it is voluntarily and on your own terms by embracing it or when it is forced upon you? The answer is right in front of us. Wall Street is being grudgingly forced to change as I write this. How painful has it been and will it yet become? In a great bout of irony, Wall Street has ruthlessly extracted change in the American economy that is now leading to its very demise. Wall Street is imploding due to self-inflicted causes.
CEOs put their pants on one leg at a time just like you do. There is no magical CEO bullets in business. It's common sense, hard work and luck. Businesses face the same issues of balancing their checkbooks as we do. Merrill Lynch needs to find a way to balance its check book and to create enough positive income in the future to sustain its itself or risk the same demise as everyone else in this economy.
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