Merrill Lynch and Citigroup Face Uncertain Futures

When 2007 began, Merrill Lynch and Citigroup were coming off impressive years. With strong, well-respected leadership and profits growing consistently, the financial behemoths looked positioned to continue their upward trajectory with no signs of weakness or potential pitfalls in the future. Boy how times can and have changed at both Wall Street giants as Merrill Lynch forced its CEO Stan O'Neal and Citigroup pushed its Chairman/CEO Charles Prince out the door within seventy-two hours of each other. In modern financial history, never have two of the world's largest financial organizations changed leadership so close to each other.

The fact that the executive boards at both Merrill Lynch and Citigroup were meeting or had scheduled a meeting to discuss the top position belies the desperateness of the situation as they looked to calm investor fears and to make tough decisions that would be in the best interests of their companies. But both executive teams had their decisions made for them, at least publicly, as Stan O'Neal and Charles Prince resigned or retired avoiding the appearance of being fired. I am not sure what the difference is between a forced resignation or retirement and being fired but for some reason it is and therefore Robert Rubin woke up as chairman of Citigroup this morning and Merrill Lynch has appointed two executives to run their day to day operations.

Two questions have to be on the minds of most investors and people involved in the financial community. With both Merrill Lynch and Citigroup announcing quarterly losses that exceeded $10 billion, the growing concern is that they can not be the only two institutions that suffered in the face of the subprime lending fiasco that has worn just about everyone associated with finance out over the last six months. So if Stan O'Neal and Charles Prince led just two of the companies in the financial community are they the only ones who will have to pay the piper for involving themselves in the now debunked investment vehicle known as collateralized debt obligations? If not, who is next? Could Morgan Stanley's CEO be next? What about a regional or national bank like Wachovia? In Memphis, First Tennessee announced record losses in their mortgage department from these cdo's. That did not pull the trigger to fire the CEO but I am sure people with a great deal of stock in First Tennessee are wondering if cutting their losses with the leadership is better than riding the uncertain wave that is coming.

The second question on the minds of investors is whether the industry has hit rock bottom yet. Given the fact that this is the first quarter with substantial losses in foreclosures and defaulted mortgage loans there is a better than even chance that this quarter will not stand alone as a bad three month period for banks and financial organizations. It would be naïve to believe that and I do not believe most are that gullible. So if more losses are to come one can then only reckon that it is time to sell any and all financial holdings until the industry has bottomed out and new money is flowing again as opposed to government-backed cushions that look to stabilize the industry.

When the quarterly statements were being prepared by Merrill Lynch and Citigroup a couple of weeks ago in the face of announcements that losses would be coming I am certain that O'Neal and Prince knew the quarter had not only been bad what they did not count on is having the rug pulled out from under them and them paying the price as responsible for the strategy to buy CDOs. With the burden laying at their feet and their peers treating them like the plague it is no small wonder that both of them woke up this morning with no place to go and no office to enter. They are retired now and you can bank on that.