Financial firms have written down more than $100 billion in capital (at the time of this writing). And, the destruction of capital is expected to spread now that some bond insurers seem to be on the lip of insolvency. Not to pick on our friends at Merrill, but … Merrill has written off nearly $22 billion in the past two quarters. Even without adding in its colossal quarterly losses, this figure sets a world record for destruction of capital not due to malfeasance. (In fact, if you can think of a bigger, honest business blunder than Merrill's, do let me know.) Yet, amazingly, Merrill was able to just write the sum off and keep on truckin'. Well, kind of. It did need those cash infusions from foreign investors, of course.
Turns out, this need for foreign capital at Merrill and Citi has tarnished investors' trust in the firms. According to a survey by Strategy One, a unit of Edleman, a public relations firm, 45 percent of those surveyed said they are less likely to trust Merrill Lynch after hearing about the foreign investments, and over half of those surveyed said they are less likely to trust Citi, according to Strategy One. (The group interviewed 1,000 people by phone in January.)
A friend of mine, who once worked at Merrill but now works at a hedge fund, says that he was amazed when a relation of his asked him if he should move his account away from Merrill because of this need for outside capital. In short, the relative was worried he'd lose his nest egg. “Of course, the answer is no,” my friend says, “but it is just amazing to me that reasonably well-informed people are even questioning whether Merrill is headed for insolvency.”
Of course, the retail brokerage units at Merrill and Citigroup have enjoyed strong net new asset flows, so the firm's reputation can't be too damaged. Then again the stock prices of financial firms have been seriously battered in recent months. And recent headlines and the outright fear the credit crunch has caused in the capital markets can't be helping financial advisors to communicate their “value propositions” to clients.
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