Tuesday, February 24, 2009

The Merrill Bubble

It is pretty fascinating that Merrill which ranks horribly in both increasing writedowns and change in leverage over the past 5 years has the highest compensation as % of operating profit (when this was positive). Merrill is the only firm that paid out over 100% of its operating profit to its employees over the '03-'08 period (185% to be exact). Even mighty Goldman barely registers on the chart when compared to Merrill on these parameters. Hat tip to Mike Cembalest.

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16 comments:

Anonymous said...

This is misleading - you can't compare comp for a money center such as Citi of BofA or JPM with hundreds of thousands of hourly employees (tellers) to comp for a broker dealer (GS or MS) to comp for a retail broker (Merrill).

Just as misleading is looking at average bonus/employee (same reasons as above).

Gentlemutt said...

Hello,
That is a lovely 3-D chart. Tufte would be proud of the author, presuming the circles representing compensation are sized by area and not by diameter or radius, as was done by other chartists lately.

Anonymous's point about comparing Citi et al with Merrill, BS, LB, MS, and GS is well-made.

One other worry though, is that the x-axis is unclear (to me, granted). What is definition used for Change in Leverage? Reason I ask is that JPM reported 5.91% "leverage ratio" in June 2007, and the book Banking on Basel by Daniel Tarullo, page 147, reported 5.57% for Dec 2003.

If, and this may be source of my confusion, one takes the inverse of these numbers one gets:
Jun 2007 1/.0591 = 16.9
Dec 2003 1/.0557 = 18.0

That suggests leverage at JPM declined about 6% over that interval, not ~30% as indicated in the chart.

Anyway, great looking chart, any help understanding where i went wrong would be much appreciated.

Tyler Durden said...

* Leverage. Firms that increased leverage tended to be broker-dealers ramping up risk after the abdication of the broker-dealer net capital rule(EOTM, September 26, 2008), or banks like Citi and UBS loading up on exposure to AAA paper that was guaranteed by insurance counterparties who
were themselves leveraged 100 to 1. Leverage excludes off-balance sheet entities such as SIVs (later consolidated by banks such as Citi), and growth in unfunded loan commitments.

* Writedowns. UBS and CSFB writedowns for Q4 2008 have not been reported; these data points will likely get worse, articularly UBS. Bear Stearns writedowns are understated (last reporting uarter Q1 2008). Most amazing writedown of all: $5 billion of structured credit insurance that MBIA simply walked away from entirely, leaving its broker-dealer counterparties
uninsured (as reported in August 2008 MBIA press release). Unlike AMBAC and MBIA, AIG's structured credit customers were bailed out, at a cost now exceeding $120 billion. Beneficiaries of this decision include Goldman Sachs, which according to AIG chief executive Robert Willumstad's
Congressional testimony, had $20 billion in credit derivative exposure to AIG's Financial Products division.

* Compensation. Merrill is the only firm that paid out over 100% of operating profits to its employees (185%, to be specific) over the 5 year period. Merrill is Godzilla on this chart in many ways, none of them favorable. The question for regulators is to what extent should Merrill, which paid $4 billion in 2008 bonuses after having lost twice its book value, be the casus belli for restructuring the financial system, the bank rescue plan or the TARP.

dgalbraith said...

@anon "you can't compare comp for a money center such as Citi of BofA or JPM with hundreds of thousands of hourly employees (tellers) to comp for a broker dealer (GS or MS) to comp for a retail broker (Merrill)"

Yes you can, and that's the point. They are all banks now.

williambanzai7 said...

But you can compare ML, GS, MS and BS...fascinating Captain...

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