| Q. |
|
How could Merrill Lynch have reported such a large loss from CDO and mortgage assets? |
| |
| A. |
|
The majority of these losses related to CDOs within our structured credit business in FICC.
Consistent with Merrill Lynch’s position as the leading CDO underwriter for 2006 and
year-to-date 2007, the firm accumulated assets for structuring and distribution. As a result
of unprecedented credit spread movements and the market’s sudden illiquidity, Merrill Lynch
was positioned with significant exposure to these securities, which before the market
dislocation were largely intended to be distributed. Effectively all of the securities that
affected these losses are rated AAA or the highest rating available from the major credit
rating agencies. During the third quarter, we meaningfully reduced our exposure to this asset
class and expect to continue to do so. |
| |
| Q. |
|
What have you done to keep this from happening again? |
| |
| A. |
|
As noted above, the markdowns we took during the quarter were concentrated primarily in
structured credit products within FICC. We have changed the leadership of the FICC business by
promoting David Sobotka to global head of FICC, who has a deep background in trading risk. We
have also promoted Ed Moriarty to chief risk officer, reflecting our continued focus on
emphasizing strong controls and integrating different risk management disciplines under a
single point of leadership. Ed brings considerable experience and industry knowledge to this
role. Prior to this appointment, Ed led Global Credit and Commitments, with responsibility for
all of the firm’s risk emanating from our deal, financing, underwriting, and principal-related
activities. Finally, we are in the process of analyzing our risk framework and limits to
incorporate stress scenarios based on the more volatile spread movements seen this summer. |
| |
| Q. |
|
How have your other businesses performed? |
| |
| A. |
|
Despite challenging conditions, the majority of Merrill Lynch’s businesses, including most of
the businesses within FICC, have performed solidly this quarter. Within FICC, Rates and
Currencies are expected to report significant sequential revenue growth and Commodities and
principal investing continue to show solid performance. Our major businesses outside of FICC,
including Equity Markets (excluding the firm’s private equity business), Investment Banking
and Global Wealth Management, are each expected to report revenue growth in excess of 20% over
the 2006 third quarter. |
| |
| Q. |
|
How will the fourth quarter and 2008 be affected? |
| |
| A. |
|
Although the outlook for fourth quarter revenues remains difficult to predict, we continue to
see evidence of strong long-term growth trends in each of our global businesses and are seeing
signs of a return to more normal activity levels in a number of markets. We remain confident
in our ability to drive superior returns to shareholders over the long-term. |
| |
| Q. |
|
Are there more write downs to come? |
| |
| A. |
|
We have marked all of our trading positions to current market levels, which are predominantly
based on trading and price indications we observed as liquidity began to re-enter the market
in September. As we see more meaningful trades executed in the market, we will continue to
pursue opportunities to reduce our positions. |
| |
| Q. |
|
Why has David Sobotka been given this role? What is his background? |
| |
| A. |
|
Dave Sobotka has demonstrated his success as a business leader, risk manager and key
contributor to the Merrill Lynch franchise. Before joining Merrill Lynch in 2004 as part of
the acquisition of Entergy-Koch’s trading business, Mr. Sobotka had been with Entergy-Koch
since 1997, when he joined the business to begin a base metal trading operation in London. He
moved to the company’s headquarters in Houston in 1998 to assume the role of president of Koch
Energy Trading, Inc., the natural gas, power and weather derivatives trading arm of Koch
Industries. As president, he was responsible for the business strategy and profitability of |