Thanks to my pal The Epicurean Dealmaker‘s incredible Supermassive Black Hole post, I learned a great deal more about why some investment banks survived the credit meltdown and others didn’t. My key takeaway from this must-read piece is that Merrill Lynch had a Death Wish.
See that crazy-ass blue line really going for it through 2007, while everyone else was calming down a bit? That’s your boy Stan O’Neal, Merrill’s then-CEO, going hog wild for risk.
O’Neal declared Open Season on the company punchbowl, or simply turned his back on the ballroom entirely and allowed a free-for-all, as many now believe.
According to TED’s research, Merrill’s average balance sheet leverage between 1999 and 2003 was 18.5x shareholders equity. Fast forward to the fiscal year end of 2007 and you’re talking about 32x equity – a 73% increase in average leverage in 4 years! This is like going from an occassional glass of wine to a daily regimen of painkillers with tequila shot chasers.
By 2007, Merrill Lynch had apparently made the conscious decision to down the whole bottle. Wallowing in its own self-pity at not being as smart as Goldman or not being as pretty as Morgan, Merrill Lynch overdosed on credit – outdoing all of its peers- which is certainly saying something.
Looking at that blue line racing for the coveted title of “Most Levered”, I’m reminded of a line from the eulogy given for the character Drugs Delaney in the film Outside Providence:
“When everyone else took one, he took two!”
Bank of America inherited the twitching semi-corpse of a firm that had literally killed itself, ramping up the leverage until the bitter end.