Merrill Lynch Datapoint of the Day

This comes from Heidi Moore's excellent round-up of today's BofA/Merrill news, which included the astonishing figure that Merrill Lynch managed to lose $15 billion in the fourth quarter.

"To put [the] $15 bn after-tax [loss] in perspective, 60% of the common equity base of the company was lost in one quarter," Goldman Sachs research analysts noted wryly in a research report this morning.

For all the talk about these losses, it's still a bit unclear how they suddenly sideswiped everybody in December. On this morning's conference call, BofA CEO Ken Lewis was asked about this, and replied:

Yes, in a nutshell, much, much higher deterioration of the assets we had identified than we had expected, going into the fourth quarter. So our forecast of losses, Merrill Lynch's forecast of losses and, frankly, I would think most anybody in the capital-markets business would have forecasted a lower loss rate than what we saw, so it wasn't an issue of not identifying the assets. It was that we did not expect the significant deterioration which happened in mid- to late December that we saw.

I, for one, still don't understand what happened in mid-to-late December. The stock market was flat, the fixed-income market was uneventful: how, then, did Merrill's balance sheet suddenly blow up so spectacularly? Had Merrill managers been hiding those losses for a long time, only to decide to recognize them when the firm had only a couple of weeks to live in any case?

There are other questions, too: How can a black hole of that magnitude not be picked up by a due-diligence process? And how can Ken Lewis seriously expect to keep his job after this massive blunder? I think he thinks he's some kind of mensch, saving the entire banking system from the risks associated with the merger falling through and Merrill being allowed to fai. Essentially, on this view, Bank of America's shareholders are bailing out the rest of the country. But that's not something they ever volunteered to do, and they'd be well within their rights to kick Lewis out at this point.