On Merrill Lynch's 3Q Earnings Conference Call, an analyst finally asks a question that the rest of the business world is wondering (emphasis added):
Mike Mayo – Deutsche Bank
It is the view of our firm, or me, that the disclosure is not sufficient to completely understand how much remaining of the $15 billion ABS CDOs has been written down. Can you give us that percentage?
Jeff Edwards - CFO, Merrill Lynch
No. Obviously substantially.
Mike Mayo
I appreciate that the level of disclosure is so much more, but your peers didn’t take an $8 billion writedown. This is the big, lingering issue in the market. Is there another shoe to drop?
What are gross writedowns, since you gave net writedowns?
Jeff Edwards
We are not disclosing our gross amount. Let me just observe that we took substantial markdowns here. We think that reflects conservative assumptions, again. And that we incorporated the trajectory of the environment as we took this into account.
Mike Mayo – Deutsche Bank
If I can ask Stan, do you feel comfortable that there is not another shoe to drop and a lot more writedowns on the ABS CDOs?
Stan O’Neal - (Former) CEO, Merrill Lynch
We have tried to capture everything that we can capture at this point, in the market. The expectation for progression of these securities as of the date that we took the markdowns. I cannot tell you what the market trajectory might be from here, but as of the date that we took these markdowns, and even looking at it as we sit here today and observing the general environment, we are comfortable that we have marked these positions conservatively.
Mike Mayo – Deutsche Bank
How did you wind up with such a large concentration in the first place? I mean, the number of employees is such a small fraction of the overall firm, and it results in results like this? I guess I am asking about risk management, and what went wrong and what happened in the last three weeks to wind up with $3 billion of additional charges?
Stan O’Neal
The $3 billion in additional charges is taking a look at the methodology and going through the marking models, again, and coming to a conclusion that is still within the same range that we had before, but it was more appropriate to be at a more conservative end of the range than we had previously indicated. That is where the $3 billion comes from.
Why do we have such a large position in the first place? made in the businesses themselves, and there were some errors of judgment made within the risk management function, and that is the primary reason why those exposures exist.
Mike Mayo – Deutsche Bank
And as far as potential divesting of non-core assets, when might we hear more about that?
Stan O’Neal
As soon as we are able to talk about it.
