Editore"s Note
Tilting at Windmills

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November 15, 2007
By: Kevin Drum

FULL ACCOUNTING....Merrill Lynch was widely expected to appoint BlackRock CEO Larry Fink as its new chief after Stanley O'Neal left the company earlier this month. Instead they chose NYSE CEO John Thain. CNBC's Charlie Gasparino explains what happened:

CNBC has learned that Fink said he would take the job but only if Merrill did a full accounting of its subprime exposure. At that point, Merrill, which owns 49% of BlackRock, moved in a different direction and decided to go with Thain instead.

Translation: Keep your hands on your wallet. (Via Barry Ritholtz.)

Kevin Drum 4:33 PM Permalink | Trackbacks | Comments (20)

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This depression is going to begin with a game of musical chairs, each fund vying to be the last to reveal the worthlessness of their assets before the house of cards collapses.

Posted by: scarshapedstar on November 15, 2007 at 4:44 PM | PERMALINK

Quick! We need more welfare for hedge fund managers!

Posted by: craigie on November 15, 2007 at 4:47 PM | PERMALINK

From Subprime mortgages, subprime currency
By John Lee
, Asia Times OL

As we have shown in the pie chart above, this 80% haircut applies to potentially $2 trillion worth of mortgages if investors of those mortgages were to exit today. The loss is not $150 billion, but more like $1.6 trillion.

Posted by: Brojo on November 15, 2007 at 4:51 PM | PERMALINK

I hope your portfolios have the words Gold and Silver in them somewhere!

Posted by: Eason on November 15, 2007 at 5:03 PM | PERMALINK

I suspect the coming recession will be in full bloom during the run up to the presidential election of 08.

Just in time to revisit the “Culture of Corruption”.

Posted by: MEG on November 15, 2007 at 5:09 PM | PERMALINK

John Lee also closed his note saying that he didn't think that any fiat currency should be a reserve currency. So he's obviously insane like Ron Paul. By the way, the guy was making that statement, which is pure speculation, as a way to pimp gold. He's clearly off his rocker if he thinks 75% of subprime mortgages are going to default.

Posted by: Mo on November 15, 2007 at 5:10 PM | PERMALINK

I thought it was to avoid the headline:


Posted by: david in norcal on November 15, 2007 at 5:27 PM | PERMALINK

David, where do I send the bill for cleaning a mix of snot, saliva, and Big Rock Warthog Cream Ale off of my keyboard and iMAC?

Posted by: charles parr on November 15, 2007 at 5:46 PM | PERMALINK

While we are on the subject of the housing market, I wanted to ask a question:

My wife and I had planned to put an addition on our house sometime in the next 10-15 years. However, with the housing market in dire shape, I figure contractors are starved for work, and maybe now it would be a good time to get that addition going because they (the contractors) might be offering good deals. We have a very comfortable mortgage with a great interest rate, and we are (apparently) on of the few Americans who actually stick money into savings every month. I figure, if the numbers look good, and we can continue to put money in the bank, let's go for it.

Is my thinking on this correct? Any advice would be great.

Posted by: Matt on November 15, 2007 at 5:56 PM | PERMALINK

Isn't this Thain the same guy who ran the NYSE, the institution which awarded Grasso some $400 million in pay just because he asked for it, and upon investigation by Spitzer it turned out the directors didn't remember doing such a thing?

Grasso got away from Spitzer by claiming that the NY AG had no jurisdiction to investigate the NYSE or something like that, but it goes to show where Thain is coming from....

Posted by: Diana on November 15, 2007 at 6:01 PM | PERMALINK

Matt, contractors starved for work maybe good, contractors about to go bankrupt very bad. Be careful.

Posted by: James B. Shearer on November 15, 2007 at 6:03 PM | PERMALINK

There is a way that ML's decision could be sensible. When a new guy comes into a bad situation he has an incentive to take excessive write downs the better to later look like a hero for fixing things. It is possible that ML thought Fink was going to do this. Maybe not the likliest explanantion but possible.

Posted by: James B. Shearer on November 15, 2007 at 6:17 PM | PERMALINK

Big Rock Warthog Cream Ale?

Warthog Cream? I don't think you should be drinking that.

Posted by: david in norcal on November 15, 2007 at 6:43 PM | PERMALINK

in fact, I'm surprised he'd let you.

Posted by: david in norcal on November 15, 2007 at 6:46 PM | PERMALINK


I am wondering if our Dem congress could introduce legislation that would freeze variable loans at their current rates.

I would think something could be worked out with the banks with the federal government guaranteeing some of the value to the banking industry so that people don't default on their mortgage.

Am I way out in left field on this? Would something like the "American Homeowner Security Act" be totally illegal?

Just curious.

Posted by: Chad on November 15, 2007 at 7:55 PM | PERMALINK

Seems to me Brojo, that Americas reserve fiat reserve is already shattered and if it had not been a fiat currency it would still be a reserve currency.

Ennyhoo, how to fix it?

Posted by: Ya Know.... on November 15, 2007 at 8:46 PM | PERMALINK

Fink is already responsible for an increasing share of ML's value through his stake in Blackrock. He most likely wanted what Mr Shearer pointed out. That translates into an almost unlimited upside and virtually no downside.

Read Michael Lewis' column on why he should be Citigroup's (or Merrill's) CEO. A quote

Before I can responsibly accept the job as Citigroup CEO or even at Bear Stearns, I needed to ask myself: Am I really qualified?

And so I did. This led to several seconds of sometimes painful introspection. But once they'd passed I had both my answer (Yes!)...

Posted by: TJM on November 15, 2007 at 8:50 PM | PERMALINK

Thain is the right pick actually. His background at Goldman in mortgages and risk mgmt which is exactly Merrill problems right now. Blackrock is now a very important part of Merrill and its better for the group to keep Fink as head of Blackrock.

Posted by: tr on November 15, 2007 at 9:57 PM | PERMALINK

i find the gasparino piece frankly idiotic (at best, poorly worded) and most likely just a plant by fink to cover his @ss for not getting the job. obviously, anyone as smart as either of these guys (thain or fink) is going to want (and get) a full accounting of the subprime problem so they can come in and clean house -- write down as much as possible in the first quarter or two of their tenure, when problems can still be blamed on the last ceo and provide them as much upside as possible. OK so let's say it was just poorly worded and what fink actually wanted was access to the full accounting BEFORE he took the job. that's slightly more plausible, but slightly different from "only if Merrill did a full accounting of its subprime exposure." there is no here here.

diana: thain was brought into NYSE after grasso, partly to clean up exactly the messes you mention. what's your point?

full disclosure: i worked at GS, although had not much overlap in tenure with thain and certainly never met him, had any contact with him, etc. etc. (i was too minor a peon).

Posted by: groobles on November 15, 2007 at 11:17 PM | PERMALINK
There is a way that ML's decision could be sensible.
Well, sure. In Bizarro World! Where the headlines read: Bush & Khameini to meet in Beirut for historic summit, while Hamas seats first Knesset member. Cheney announces post-VPOTUS post - UNICEF head; his name first floated by Medicins sans Frontieres.
His background at Goldman in mortgages and risk mgmt which is exactly Merrill problems right now.
This may be the case, but if true it serves to illustrate why: a. Merrill Lynch is still working the smoke and mirrors strategy b. Fink was far and away the better choice

Who is going to have the better understanding of current and near-term foreseeable risks:
a. the guy who insists on a full accounting of sub-prime exposure before taking the position;
b. the guy who doesn't

Groobles - you bring up a good point, it may have been a plant by Fink(where's the announcement that Thain insisted on the same?), but if there is a full accounting, the results WILL BE made available in discovery after the fecal material hits the oscillating rotor. It's in ML's interest to put that off long enough to have some plausible deniability. Negligence vs. malfeasance.
And more time to diversify ...

Posted by: kenga on November 16, 2007 at 8:24 AM | PERMALINK
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