Merrill Lynch deserves blame, not credit

Aug 25, 2008 @ 12:01 am

I am writing about the editorial in the Aug. 4 issue "Kudos to Merrill and Lone Star on their deal."

Are you kidding me?

It is because of New York-based Merrill Lynch & Co. Inc. and "other large financial institutions" that we are in this predicament.

As the editorial correctly pointed out, "these institutions themselves didn't know for sure what the securities were worth and didn't know what their capital positions actually were."

What blows me away, however, is that they sure had no problem collecting massive fees on these "unknown" products. How can they claim not to know what they are worth but know what to charge?

The editorial also mentioned that one of the factors holding back a recovery has been the lack of transparency. I will take this further and say that this is what continues to hold back our entire industry, and thankfully so.

The actions of these firms and how they treat their clients allows my company to grow.

Their motto seems to be, "Don't ask and surely don't tell, or at least don't tell until we really, really have to."

And then you praise Merrill Lynch chief executive John A. Thain for making a difficult decision. I am surprised it took him this long.

What did he have to lose? None of this happened on his watch.

Throw everything, including the kitchen sink, out the door, which Merrill basically has done ($40 billion-plus in write-downs and counting), let the board re-price his options, or better yet, praise him for "taking the bull by the horns" and give him more options, all the while screwing the shareholders and, I would guess, inevitably screwing clients by raising fees to pay for all this.

Why is it always the shareholders, clients or taxpayers that pay the price?

And let's be honest. How much risk did Lone Star Funds of Dallas and its chairman, John Grayken, really take?

Merrill financed the deal to buy the collateralized debt obligations, which only 30 days prior were valued 50% higher.

And for that, I agree with you: Lone Star does deserve credit.

I also agree that this probably signals the bottom.

Brokerage firms are notorious for buying at the top, hiring at the top and selling, as well as cutting employees, at the bottom.

So kudos to Merrill Lynch for informing us that we have reached the bottom.

John M. Nowicki

President

LCM Capital Management Inc.

Chicago

A shot in the arm for funds of hedge funds

I am writing in regard to a story in the Aug. 18 issue, "Funds of hedge funds losing their luster."

I think perspective is good when you say institutions can build their own fund-of-hedge-funds portfolios with direct strategies, because they have scale.

However, a qualified purchaser — a retail client with $5 million to invest — let's say has $5 million to invest at a 10% allocation, needs a fund of hedge funds or they assume the risk of owning one manager (if they can get in at $500,000).

Isn't that what financial advisers preach — diversification of the long portfolio? So why would they think they know better than the funds-of-hedge-funds groups that have been doing this for years?

The newspapers are all too familiar with the disasters with a single strategy gone bad.

Apply that core-and-satellite approach from the long side and build intelligent hedge portfolios like institutions still do.

Last I saw, the top five funds of hedge funds firms have been growing assets year over year.

Maxwell Osborne

Vice president

Permal Group Inc.

New York

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