Thursday, July 17, 2008

Merrill Lynch posts big loss, reassures account holders with formal statement and publication

Since I use Merrill Lynch for some cash and retirement portfolio management myself, I was alarmed when I heard that the brokerage house today posted a second quarter $4.9 billion loss.

The company today posted a PDF “Why Your Accounts Are Safe at Merrill Lynch,” at this URL.

The paper discusses several issues. First, there is “safe securities holding practices,” including physical holding of the securities at Depository Trust Company.

The main issue, of course, is separation from individual accounts (cash management accounts and IRAs of various kinds) from the investment bank’s own assets. There is a mechanism provided by the Securities Investor Protection Corporation (SIPC). “SIPC funds are available to make up for any shortfall in client assets that the broker-dealer was required to maintain” up to $500,000 per client, outside of cash, which itself is insured in a customary and familiar manner by the FDIC for up to $100000 per account.

The company today (July 17, 2008) also posted a pseudo-pop-up for account holders that says “We've recently announced the sale and expected sale of non-core assets such as Bloomberg, L.P., and the capital raised in aggregate from these deals is approximately $8 billion. We have record excess liquidity of approximately $92 billion (at June 27, 2008)--up significantly from the first quarter of 2008.” Major media outlets and wire services (like the AP) will carry various versions of this story.

None of this contradicts the fact that the securities themselves in an account are generally not insured, and that their value rises and falls according to the market.

When I was working for Chilton Corporation (credit reporting company) in Dallas in the 1980s, it was bought by Borg-Warner which in turn was bought by Merrill Lynch Capital Partners in a leveraged buyout in 1987. At the time, the bottom line demands on the company were stressful for the company and employees, until Chilton was finally sold to TRW in 1989 (to eventually be spun off as Experian -- much of which is still in the Dallas area, ironically). But management, for over a year, talked about "Merrill Lynch" as their owners as they felt pressured to make "Merrill Lynch" happy. Even then I had started my CMA. What goes around comes around.

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