The End of the Merrill Myth

There is absolutely no silver lining to the $8.4 billion in writedowns that Merrill Lynch announced today. Merrill is being hit from all sides: sell-side analysts, on the conference call; journalists; ratings agencies; and, of course, the stock market. Dana Cimilluca is looking at the magnitude of the loss and coming to the conclusion that it's absolutely enormous by any measure.

But the biggest hit, in the long term, will be to Merrill's reputation. I'm old enough to remember when Merrill was the number one debt house in the world: the Thundering Herd was known and feared across Wall Street as the best of the best when it came to bond trading. They made the biggest profits, they had the biggest market share, they earned the biggest bonuses.

Now, however, all that is gone. If Merrill couldn't even judge the extent of its losses accurately at the end of September, there's no reason whatsoever to believe that it has its act together now. Merrill is now trading on a price-to-book ratio of 1.54, compared to 2.47 for Goldman Sachs. If Merrill's share price is going to recover, its management is going to have to get the denominator up a lot. Because the ratio itself is going to stay in the doldrums for the foreseeable future.