In
this edition we take a look at the world of high finance as a change of pace from
our examination of the uneven playing field in professional sports. I am not surprised
and trust that you, too, are not surprised to find out that things are not much
different on Wall Street.
As you know, a number
of Wall Street brokerages have been stung by bad bets on the market for risky,
or subprime, mortgages. The total hit for Wall Street stands at more than $27
billion. Washington Mutual recently announced that it would take an $820 million
write down in its loans and securities. Citigroup, UBS, Deutsche Bank, Lehman
Brothers, Goldman Sachs and Morgan Stanley have lost a total of $14.1 billion
as a result of the subprime crisis. .
Word
on the street is that Citigroup Inc CEO Charles Prince may be shown the way to
the exit as a result of a 57% drop in third quarter earnings as a result of the
revaluation of mortgage-related assets. The head of investment banking at UBS
AG, a Swiss Bank, recently resigned following word that UBS took a $3.4 billion
hit. However, the first CEO to pay the price is Stanley O’Neal, the highest
ranking Black on Wall Street. No matter how things change they remain the same.
You know, the LIFO accounting…the accounting method for recording the value
of inventory which presumes that the next item to be shipped will be the oldest
of that type in the warehouse…or last in, first out.
Mr.
O’Neal is being forced out at Merrill Lynch as a consequence of last week’s
announcement that Merrill would write down $8.4 billion in the third quarter --
$7.9 billion of that connected to its revaluation of mortgage-related (subprime
mortgages) assets. Despite the losses, many Wall Street executives were stunned
by the speed with which the board, most of it picked by Mr. O’Neal, was
willing to throw its chief overboard. Why the surprise? Well, for starters, Mr.
O’Neal had been widely credited with boosting Merrill Lynch’s profitability
and transforming it from a U.S.-focused retail broker to an international financial
giant with strong footholds in commodities, private equity asset management and
bonds. Mr. O’Neal had more than doubled Merrill Lynch’s profit level
to an average topping $5 billion annually from 2003 to 2006.
Despite
the recent write-downs, Merrill’s balance sheet has ballooned – by
58% over the past 18 months to $1.08 trillion in assets, including $70 billion
in cash and readily salable securities.
While apparently not enough to save his job, we need
not worry too much about Mr. O’Neal’s
future. He will walk out of the door with about $154
million in pension payments, stock options and direct
holdings of Merrill stock, and could pocket more if
Merrill’s board gives him a severance package.
These payments are on top of the $48 million Mr. O’Neal
was paid last year, one of the richest packages on
Wall Street. Even though we remain subject to the
LIFO accounting method when it comes to opportunity,
at least now some of us reap the same benefits as
our counterparts on the way out.
