Friday, December 9, 2011

Merrill announces the NEW rules for investing - so what were the old rules? Or should we revisit Merrill's 1998 Annual Report?

While on drive time today, a commercial interruption brought to you by Merrill Lynch Private Wealth Management beckoned would be customers to learn the "new rules for investing" - last I checked the securities industry was fighting tooth and nail against a fiduciary standard.

But MORE inportantly what were the "old" rules?
Perhaps we could go back to Merrill's 1998 annual report wherein it stated - as captured in Roger Lowenstein's LTCM tome "When Genius Failed"
see page 235, "Merrill Lynch uses mathematical risk models to help estimate its exposure to market risk" as Lowesntein wrote, in a phrase that suggested some slight dawning awareness of the dangers of such models, the bank added that they "may provide a greater sense of security than warranted; therefore, reliance on these models should be limited".

However, it appears that when it came time to lobby the SEC to create the 2004 vintage CSE (Consolidated Supervised Entity) program "only for the largest and most sophisticated broker dealers" the annual report writers and or signatories had had a technologic transformation only to be undone in a mere four years; as the Chairman Cox ended the infamous CSE program on September 26, 2008.

However, still today those models' valuations are wreaking havoc the world over and then some; some "markets"! What would US and or EU regulators today think of the opportunities they lost from not having passed their eyes over the prescient words from mother Merrill and taken counsel! How many foreclosures could have been avoided? How many bonuses could have been avoided? Oops or perhaps that's the reason they forgot to read - anything?

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