Investment Banking's Continuing Fallout: BofA and Merrill Lynch

Today's Wall Street Journal editions features two significant stories involving BofA's capital markets restructuring, personnel reshuffling and recent losses, and Merrill Lynch's Stan O'Neal's woeful and inept risk management oversight.

In light of the BofA pull back from capital markets my recent post, here, seems almost uncanny.

Truth be told, BofA's pretension to be a capital markets power, as the Journal article cites,

"The top-to-bottom assessment of the investment bank, coming less than a week after the company reported $1.45 billion in third-quarter trading losses that caused its overall profits to tumble 32%, is the strongest indication yet that the nation's largest consumer bank may face insurmountable hurdles in its quest to compete against giants such as Goldman Sachs Group Inc. and Merrill Lynch & Co. on Wall Street,"

has always been somewhat delusional. And, personally, I take issue with even lumping Merrill Lynch with Goldman Sachs.

Anyone who has been close to the investment banking sector, knows professionals in it, etc., will probably agree that the sector's roots in smallish partnerships is an important distinguishing characteristic. That BofA could have ever seriously entertained the notion of becoming a competitive force among investment banks is, honestly, laughable.

Investment banks like Goldman, Morgan Stanley, Bear Stearns, and Lehman, are, essentially quasi-organized bands of financial market buccaneers. You need look no further than the classic boardroom battle at the original Lehman Brothers, between Pete Petersen and Lew Glucksman, to understand this, and the golden rule of investment banking, he who has the gold, rules.

And it's a lot of gold. That's why the very best financially-applied minds skip commercial banks, and go to investment banks. I wrote a bit about this recently, here.

So the conundrum for any commercial bank- Chase, Citigroup, BofA- is one of living with a foreign virus called 'investment bankers,' and the risks the freewheeling trading and deal making styles they bring, or accepting the expensive luxury of a smallish, uncompetitive, second-rate investment banking unit which can never truly rival their peers at pure investment banks.

The largest three US money center banks' strengths involved far-flung international networks, a broad presence across deposit, fee and lending businesses, and, long ago, credit ratings superior or equal to those of their customers. They were never known for attracting the best minds. Those people headed for the far more profitable territory of investment bank partnerships. And, even after the last of these, Goldman, went public, it still offers compensation levels far in excess of those even the very highest levels of commercial banks.

If you don't believe me, go check out the recent compensation data for Ms. Amy Woods Brinkley, BofA's (soon to be former?) Global Risk Executive. According to the company's profile on Yahoo Finance, she earned a total of just under $8MM in cash and exercised options last year.

Maybe the gang from Charlotte never really understood that merely appropriating the BofA name didn't grant them entree into the innermost sanctum of American capitalism, trading and investment banking. Judging by the $675MM spent on hiring traders and bankers, and the 'deep into the red' trading losses this year, according to the Journal article, Lewis and his team badly misjudged just what it would take for their expensive dreams to pay off.

The same can't really be said of Stan O'Neal, Merrill's hapless CEO. According to Forbes, O'Neal was paid some $22MM last year, and more than $50MM over the past five years. Capping his career at the retail securities giant, he became CEO in 2003, thus owning the current team and decisions leading to yesterday's admission of a larger writedown than had been acknowledged just a few weeks ago, here.

A conversation yesterday with a friend who is a former Merrill employee confirmed that O'Neal had replaced senior fixed income executives in recent years with his own choices.

Of course, O'Neal reportedly has one more line of Praetorian guards to shove between him and the his board's indignation: President and COO Ahmaas Fakahany and CFO Jeff Edwards.

Yesterday, on CNBC's morning SquawkBox program, former GE CEO Jack Welch, when challenged to comment on the horrendous losses at Merrill Lynch this quarter, opined that the company's CEO, Stan O'Neal, should 'be accountable.' However, upon being grilled as to whether that meant O'Neal should be fired, he backpedaled with astonishing alacrity. SquawkBox co-anchor Joe Kernen chided him for being an "old boy" and reserving judgment on fellow CEOs. Welch just sat there and remained silent.

So much for Jack giving it to you "from the gut."

But, surely the Merrill board of directors, enumerated here, will be calling someone to account for this $8B loss of shareholder value? Hopefully O'Neal and his management team.

So here we have two CEOs, Ken Lewis and Stan O'Neal, of two investment bank-wannabe firms, BankAmerica and Merrill Lynch, losing a combined $9B so far this year from playing in the sandbox of their more skilled rivals, Goldman Sachs and Morgan Stanley.

If this sort of experience and result doesn't help people distinguish between the cultures, risk management and performances of investment banks, retail securities firms, and commercial banks, I honestly don't know what will.