Image: The Crown Publishing Group
In the annals of books written about the financial crisis this book by Greg Farrell is indeed a riveting read. The narrative is fluent and flows like a movie screenplay. It will leave you wanting sensible answers for the hubris while the house of cards crumbled. The story of the book revolves around decline and eventual acquisition of Merrill Lynch by Bank of America. It is amazing to get up close during the most strenuous time in financial world. A lot of other books have covered the unnerving weekend in September 2008, the Monday before the collapse of Lehman Brothers. However, this story zooms in on the ups and down of Merrill’s future culminating in the fateful decision that will cease Merrill Lynch as an independent entity by the beginning of the following year.
If you’ve been following the financial crisis, then you cannot help but notice one recurring trait displayed by Wall Street: hubris. Even when collapse of the financial system seemed all but inevitable with failure of Lehman, many executives, most notably John Thain of Merrill Lynch wanted to secure bonus for 2008 while the firm was still independent. The wrangling over bonus was for an uneventful year in which nothing but gargantuan losses were reported. The losses so severe that it threatened Merrill Lynch’s existence despite capital raises several months earlier. John Thain deserves credit for capital raises but he was premature in foreclosing on need for further capital with several public pronouncements. Like most everyone else, Thain completely underestimated the severity of economic and financial convulsion. The astonishing fact is that there were only handful of people that were at the core of steering Merrill Lynch towards the iceberg. It was as much a failure of risk management as it was the lure of short term profits. By allowing the fixed income group to load up on mortgage related securities Merrill exposed itself to market illiquidity that was to follow.
Based on interviews of the main characters, Greg Farrell does excellent narration of constant and most often subtle power play between the executives and the board of directors. The ascent of Stan O’Neal to the corner office and his dramatic overthrow when he fell out of favor with the board was testament to seriousness of the situation. The other constant was mysterious leaks to the media and press on sensitive corporate matters. The transfer of power by Ken Lewis in 2009 was just as quick when Bank of America losses were mounting and required urgent infusion of billions of dollars by the taxpayers. The shocks of shotgun marriage with Merrill Lynch and surprising losses in both firms resulted in Ken Lewis steadily losing support among the board members.
In the modern lexicon particularly after the recent financial crisis, Wall Street and greed have become synonymous. Impervious to their role in bringing down global financial system, Wall Street goes about business as usual when it comes to compensation and what they believe as divine privilege bestowed upon them to partake ever larger share of financial windfall. In the book, John Thain is negotiating his compensation beginning from around $40 million all the way down to $4-5 million in the face of red ink on the books. The matter is awkwardly settled after Goldman Sachs executives decide to forego their bonus for the year 2008.
One of the thing that is clear from the book is enormous effort by top executives to right the ship. But ultimately the losses proved too big and financial turmoil too deep for a turnaround.
With moral hazard all but institutionalized expect bigger and more spectacular crisis because, as we will be told time and again, the institutions that now remain standing in the realm of finance are simply too big to fail.