Wall Street abounds with speculation that Greg Fleming, who has managed to hold on to his position as sole president of Merrill Lynch through a whirlwind of management changes, might finally be facing a challenge that could shake him out of his elevated position.

Fleming’s presidency has endured the worst losses in the history of Merrill, internal criticism, and alleged pressure from newly minted chief executive John Thain. Although the Justice Department’s investigation is in its earliest stage, rumors are already spreading, both within and outside of Merrill, that the threat of a criminal investigation might bring Fleming down.

Despite rapid changes in the management structure at Merrill Lynch, Greg Fleming has held onto his position as the president of the firm. He has insisted that he will remain the sole president, and resisted any plans to elevate others at the firm to be co-president. But his inflexibility on this point may be imperiling his position, according to people familiar with the situation.

“He’s on the verge of a nervous breakdown,” a source tells DealBreaker. Others dispute this characterization however, saying that Fleming shows no signs of anything like "a nervous breakdown."

When John Thain took over as chief executive of the bank, one of the very first changes he announced was a flatter management structure. More executives now report directly to Thain, in effect circumventing Fleming’s office. Under Stan O’Neal, the risk management executives did not report directly to the top—a situation which has been blamed for some of the excesses that lead to enormous losses over the last several months.

Fleming, who also serves as chief operating officer and oversees the investment banking business, is said to have dug in as president, and told others that he will not accept a co-presidency with others at the firm. This is seen by many as resisting the flatter structure Thain is putting in place, and may be alienating him from others at Merrill. Perhaps more important, Thain is thought to be chagrined by Fleming’s stance.

“Fleming could have been a team player. He’s still got the investment bank under him,” said one person with knowledge of the dynamics within the firm. “But he went the other way. He saw moving back to being just head of investment banking as a demotion.”

Some feel that the flatter management structure has effectively demoted Fleming already. With the new head of risk management, the top spokesperson, their general counsel, the chief financial officer and the brokerage head of the brokerage arm, among others, reporting directly to Thain, the office of the bank’s president may be superfluous. Last week, both Market Watch and Bloomberg referred to Fleming as the “chief operating officer” of Merrill without mentioning his role as president.

Fleming remains respected as an investment banker at the firm, even by those who are surprised at his alleged inflexibility. He remains youthful, plain-spoken and full of energy, according to people at Merrill Lynch. He is known as a perfectionist and an investment banking star—which is all the more reason his continued grasping to the title of sole president has some feeling “mystified.”

Merrill Lynch would not comment on this story.

So who is on this list of 14 companies under investigation by the FBI for their involvement in the subprime mortgage crisis? The FBI apparently intends to keep us in suspense because they won’t give details. All we know is that they are looking into “allegations of fraud at various stages of the mortgage process, from companies that bundled the loans into securities to the banks that ended up holding them.”

So let’s recklessly speculate. Two companies that are sure to be on the list are Bear Stearns—which is already under investigation by federal prosecutors and the SEC—and Countrywide, which is both the biggest home loan lender and also facing an SEC inquiry. Goldman Sachs is very likely on the list. It was accused on the pages of the Sunday New York Times of misleading clients by packaging CDOs while shorting the mortgage market. We know that at least one Senator read the article and has been making a stink, and we know that federal investigators often get their leads by reading the paper. What’s more, Goldman Sachs has said that it is cooperating with an unnamed government agency.

Morgan Stanley has also admitted to cooperating with unnamed government authorities. At first, everyone assumed this was the SEC. But why wouldn’t they come out and say that? More likely they declined to name the agency out of fear that saying they were cooperating with the FBI would tar them with serious criminality—rather than the everyday Wall Street shenanigans implied by an SEC investigation.

So that gives us four good leads. Who else is a cylon on the list? No doubt some additional mortgage companies and some home builders. Maybe the ratings agencies are also. Leave your guesses in the comments section below.

FBI Launches Subprime Probe [Wall Street Journal]

Yesterday Merrill Lynch said that Greg Fleming—the bank’s president and chief operating officer—and Bob McCann—who heads the brokerage business—would not receive bonuses for 2007. This decision was made by the board of directors on Monday, according to a filing with the Securities and Exchange Commission.

Zeroing out executive bonuses has become something of a trend on Wall Street. Bear Stearns and Morgan Stanley have made similar moves. But before you weep for Fleming and McCann you should read the fine print. Both men received their base salary of $350,000 as well as "retention options."

The real story here, however, is taking place more quietly and behind the scenes. Newly minted chief executive John Thain is working to dismantle some of the institutional hierarchy of Merrill, flattening the leadership structure and having more executives report directly to him. This is widely seen as effectively demoting Greg Fleming—who, for now, still holds the title of President of Merrill—who will no longer be a gatekeeper through whom more junior executives report to the chief executive. There has been some talk by insiders that the unwinding of the hierarchical structure that grew under Stan O’Neal has some executives bristling that they are losing rank and authority.

Yesterday Thain told investors that Merrill is exiting the collateralized debt obligations and structured credit businesses.

Merrill executives received no bonuses for 2007 [Reuters]
Merrill Lynch Filing [SEC]

As hard as it is to believe, the guy who ran the market risk team at Merrill Lynch from March of 2005 right into last year's Summer of Blood still has is job. In fact, Ahmass Fakahany was named co-president with Greg Fleming in May. But the dancing had to stop at some point since the music ended months ago. And this morning, Charlie Gasparino of CNBC reported that Am-Fak is set to resign later to day.

Update: Charlie G says that there are going to be more layoffs. There is a review of the brokerage business that is expected to result in job cuts. But no-one really fires brokers, you just don't pay them if they aren't earning for the firm. So these cuts will most likely be support staff folks.

To judge from the comments and our email, many of our readers think we’ve lost our minds on Merrill Lynch. We were impressed by the performance of Thain and Co. on this morning’s earnings call and wrote a good deal about it early this morning. We thought it was a strong performance but readers point out that shares of Merrill have been plummeting all day long. They say this indicates that the market doesn’t buy our evaluation of the earnings call. We’re not so sure. It may have been far worse if Thain and his guys had come off as badly at Vikram Pandit’s guys did on Tuesday.

We aren’t yet at the point where we’re going to be swallowing Thain’s kool-aid but our attention to his words might have led us to overlook something in his interview with CNBC’s Maria Bartiromo. This afternoon Street Insider points out that the interview took place on the fixed income trading floor. Why do it there? Well, perhaps to prove that people are still trading fixed income—or that the place has totally been totally cleaned up since that unspeakable incident we wouldn’t stop talking about earlier this week and last week. (Update: They were on the seventh floor, twelve floors below the scene of last week's crime.)

But this might not have had the desired effect. The traders on the fixed income floor seemed oddly unoccupied, gathering in the background and looking at their boss—or perhaps themselves—on television monitors. This has people wondering why these folks weren’t busy engaging in actual trading.

“Traders usually do not have time to do many other things, than trade, but this morning this small group of traders were more concerned with their tv appearance than making money for Merrill Lynch,” Street Insider says. “I don't know if this should tell you something about how John Thain runs Merrill, or if this was just a few traders that had a slight lapse in judgment, in what has been very tough days for Merrill Lynch workers in recent weeks.”

Merrill Lynch Traders Do Not Appear Too Busy [Street Insider]

After his well-received conference call and an appearance on CNBC, Merrill Lynch chief executive John Thain spoke to employees about the firm's future. His confident and well-informed remarks about the CDO market were peppered with wise-cracks that left the crowd of employees laughing out loud, according to a source present at the talk. The mood on the floor is said to be much almost cheerful. It's a great vote of confidence for the new CEO from a group that was wary of being lead outsider said to be sometimes robotic.

"Much improved from Stan's lame town halls," the source said.

We pressed our source for more information about the meeting but John Thain had to take another call.*

Merrill Lynch could not immediately comment on this story. We're pretty sure they were afraid we were going to ask them about the Turd War again.

The name "John Thain" has been changed to protect the identity of our source.

If you missed the Merrill Lynch earnings call and are frustrated you can't find a transcript yet, we suggest you check out David Gaffen's live blogging the call. David's been doing this for quite sometime and they keep getting better. And, while you're at it, you can read Felix Salmon's summary of the call. Felix says Merrill handled the call just right. The results: "A decidedly modest drop in the share price. Yes, it's down about 2.5% from where it closed on Wednesday, but it's up from where it closed on Tuesday, when the capital infusions were announced. And at $53.70, it's already up more than 10% from its 2008 lows. Well done, that man!"

Already people are saying that Thain has poured a little Goldman magic on Merrill.

We're getting flooded by emails from analysts who are complaining that our earlier post taking them to task for getting this week's earnings so dramatically wrong isn't fair. They have to put out numbers, and are encouraged to put out numbers by both their employers, clients and the companies on which they report. In short, they're just following orders.

But what excuses the performance on today's Merrill conference call? More than one got on the call to challenge Merrill's write-downs--on the basis that Merrill had gone to far. From our perspective, it sounded like a lot of analysts were attempting to defend their own inadequate calls by raising questions about Merrill's numbers. At the very least, this is the impression we go from Citigroup's comments.

Bearish skeptics of the CDO write-downs have raised concerns that Wall Street banks may still be too confident that the market for CDOs will recover soon. They've accused banks of holding CDOs at above market value based on a belief that the market is facing a temporary, unprecedented "squeeze" rather than a fundamental shift in the risk outlook for these assets.

On today's call, John Thain made it clear that Merrill Lynch is taking the opposite position. When asked by an analyst at CItigroup about the deeper than expected write-downs, Thain replied that in Merrill's view it is unlikely that the market for CDOs is going to recover. He said that the "fundamental assumptions" related to home prices and mortgage defaults had changed. In short, the problem is not a short-term liquidity squeeze but a new view of underlying value. Forget the credit crunch. This is a real shift of economic reality.

Thain also displayed a very detailed understanding of the loss assumptions that underlie Merrill's write downs, noting that the firm is using cumulative loss assumptions on the mortgages underlying asset backed securities of between 16 and 21 percent. This is not quite a "sky is falling" assumption but it is relatively conservative and shows that Merrill is certainly not, to mix metaphors, following the pie-in-the-sky, temporary squeeze assumptions that informed, for instance, Stan O'Neal's comments on last quarter's earnings call.

People used to talk about "first mover advantage" but sometimes going second can have a distinct advantage. CItigroup's conference call left analysts and investors concerned that the bank could not confidently discuss its write-downs, and worried that more write-downs for asset backed securities may yet loom in the bank's future. Merrill Lynch's team has done a much better job at assuring those listening into its call that it has a firm grasp on its credit market exposure.

Perhaps the first correction from Citi's approach is that where Pandit sat out most of the question and answer session, Merrill's Thain stayed involved in the call the entire time. When UBS's Glenn Schorr asked about whether write-downs on illiquid assets were deep enough that the firm could now transfer them at par value--basically, whether they had marked the assets to a market-clearing price--Thain jumped in and confidently announced that he was confident the assets were saleable as now valued.

The next correction was demonstrating a firm understanding of the risks faced by the firm. Where Citi CFO Gary "the Critter" Crittenden was forced to admit he had a weak understanding of many of the risks involved with asset backed securities, Merrill chief financial officer Nelson Chai and Thain both began discussing how Merrill's $23 billion in short hedges reduced its risk in the CDO hedges.

It's a marked contrast in how Citi handled its earnings call. Thain displayed a hands-on style, and obviously had drilled rather deeply into his firm's numbers. The ghost of O'Neal has been exorcised.

John Thain's comments on today's earnings conference call confirm reports that Merrill Lynch's new chief executive plans to rely on the brokerage business to restore the profitability and reputation of the company. We've been reporting that John Thain's new plan for Merrill Lynch will include a new emphasis on core strength's, primarily its wealth management business.

Describing Merrill as "a world class franchise." Thain went on to say that he has been very impressed with the commitment on employees to the company. He immediately began talking about the strength of Merrill's culture which he saw at a conference in Arizona. That's the same conference of managers of the firm's wealth management business that DealBreaker first reported earlier this week.

“I have been very impressed with how many of the Merrill employees talk about their commitment to the company and talk about their long tenure at the company," Thain said.

This is a one-hundred and eighty degree turnaround from the way that former CEO Stan O'Neal talked about his firm. This kind of emphasis on the brokers is meant to boost morale with a sign of respect to Merrill's legendary thundering herd.

We hear that Merrill is bailing out of at least two big private equity funds that are concentrated on real estate, selling it's limited partnership shares back to the fund managers at a discount. This is igniting speculation that Merrill could pull out of other investments as well, perhaps in an effort to raise capital before announcing earnings tomorrow. The two funds Merrill is said to have left are thought to be managed by Blackstone.

"Merrill Lynch must be in really doo-doo," a source with knowledge of the matter said.

When John Thain took the helm at Merrill Lynch, there was a lot of speculation about what direction he might take the fabled brokerage house. It seemed unlikely that the former Goldman Sachs executive continue Stan O’Neal’s drive to remake Merrill in the image of Goldman. That hadn’t worked out so well. Yesterday the Financial Times reported that Thain is aiming to pump up the importance of the global private client unit.

[O'Neal] also worked hard to de-emphasise Merrill’s private client group – the public face of the bank for years. He demoted Bob McCann, president of that division, so that he didn’t report directly to Mr O’Neal, and refused to put senior retail officials to the executive board.

Now, insiders at Merrill say, Mr Thain plans to elevate the importance of the global private-client unit again. This can only be a good thing given that the bank paid 24 times forecast 2007 earnings and 3.4 times current book value in January 2007 to acquire private bank First Republic specifically to expand its high net worth business.

Thain reverses ‘Goldmanising’ [Financial Times]

At a table near the back of the Tribeca bar the bankers from Bear Stearns and JP Morgan were laughing about the Merrill Lynch turd attack. The rumor had spread late in the evening that it wasn't a fixed income research analyst who stomped in his own crap and spread it around the 19th floor of Merrill Lynch's headquarters at the World Financial Center. Everyone at the table now believed that it was an equity trader who blamed the folks at fixed income for his diminutive bonus.

"He shit on them because they shit on him," the pretty girl who improbably works as a bond trader said.

We haven't been able to identify the perpetrator, and the officialdom of Merrill aren't talking about this anymore. So we can't say whether this rumor has the story right but for the turmoil inside Merrill the facts of the case are beside the point. All of Wall Street has heard the story, and many now believe that it was a strike by the equities traders (or was it brokers?) against the bond buys. And the bond guys are contemplating revenge.

A few hours later, at a bar farther north and east, a few guys who work a fixed income desk at Merrill were leaning against a mahogany bar and drinking mahogany liquid poured over ice. In accordance with long standing tradition, at this point in the night they should have been be throwing hungry glances at the more than slightly drunk girls who looked like they learned how to wear their hair from MTV's the Hills. But on this Friday they were distracted by thoughts of revenge. How best could they strike back against the those who had delivered his scatological protest memo to their floor? It may have just been one guy but entire groups were now verbally targeted. Clever ideas were bandied about but the main concern was how to deliver the most damage without getting caught.

We asked whether it might not be best to let this pass without retaliation but there had been too much laughter earlier that day, and too much Scotch later that night, for such pacifist thoughts to take hold. There will be revenge, one and all pledged. We left them at the bar and wondered whether John Thain knew what his soldiers were planning, and whether or not he could find away to stop them before they make their move.

Merrill Lynch broker's aren't just crapping on their bond traders. It seems they're crapping on the clients too. At least that possibility is what has prompted the Securities and Exchange Commission to investigate whether Merrill Lynch brokers improperly placed trades for the brokerage house's own account ahead of client orders.

SEC Looks at Merrill Trading In Search of 'Front-Running' [Wall Street Journal]

Merrill Lynch’s famous bull logo has taken on a new aspect now that nearly everyone on Wall Street knows the story about the “unfortunate accident” that led to an employees shit being spread all over the place. And we’re not talking about a CDO squared portfolio.

The incident took place on the nineteenth floor of Merrill’s headquarters in the World Financial Center, according to our sources. The floor houses the fixed income group. Bonuses for the group are said to have dropped substantially from last year, although the decline was not as bad as some expected. The more senior guys are said to be very upset at their compensation but associates are pleasantly surprised after having their expectations lowered so dramatically.

But there may be more to this story than just a bonus rage. The story has been widely discussed within Merrill itself, and the predominant belief there is that it wasn’t a dissatisfied fixed-income researcher who engaged in the fecal protest. Inside the bull pen, the word is that it was an equities guy who came over to the fixed-income department and “inappropriately relieved” himself. He was supposedly seeking revenge against fixed-income for credit-market losses that have affected bonuses across the firm.

The plot thickens.

Now hear this Alan Schwartz. John Thain knows how to play this game, he studied at school of GSBS and he's got a Ph.D. Merrill Lynch is taking a $15 billion write down. You see that, that's called covering your ass. Analysts expected a $12 bn write down, but Thain said "No No" you have not lowered your expectations enough. So now he only has to live up to his newly self-lowered expectations Alan. Get that, UPOD. U "Under" "P" Promise "O" Over "D" Deliver. Do what Johny Thain does. Don't be a hero. Take the write downs now.

--Everett Stuckey, DealBreaker's advisor to newly minted CEOs.

Earlier this afternoon, CNBC’s Charlie Gasparino reported that some guy in Merrill Lynch’s fixed income research group had “inappropriately relieved” himself in protest of the downsizing of his bonus. Merrill has officially explained that this was simply an unfortunate accident, and then the bank turned red and scurried to the other side of the room.

We’ve been digging into this story because the way it’s told by the delicate souls at CNBC, it’s way to vague. What worse, the vagueness is giving rise to rumors that are totally untrue. It's fast becoming the Wall Street equivalent of an urban legends. Here’s what didn’t happen: a guy did not urinate on his desk because he was “pissed off.” The real story is so much worse.

In the first place, it wasn’t piss. It was shit. DealBreaker can confirm this much. After that the details get a bit fuzzy. The way we first heard it is that a guy took a dump in the rest room, stomped in it, and then dragged it all over the place by walking around with it on his shoes. Merrill’s story is that there was “an unfortunate accident” in one of the stalls—which we take to mean that some guy smeared his shit all over the bathroom because how the Hell could you miss the toilet—and that another person inadvertently stepped in it and tracked it all over.

So now you know.

By you know that it looks like Merrill Lynch will renew its lease with Brookfield Properties and remain in lower Manhattan, instead of building a skyscraper with developer Vornado, at the site of the Hotel Pennsylvania in midtown, right across from Penn Station, or as I like to call it, Penntation Island. New MER CEO John Thain thinks this bad idea is a good one because it'll allow the firm to focus on some credit trubs and it's something like a billion dollars cheaper than moving on up. Plus, he's in denial about not being a Goldman Sachs boy anymore, so it makes sense he'd want to stay downtown.

But that's just the opinion of one woman, who happens to hold a Ph.D in psychology and a masters in apiology. What do I know? Better than Thain, that's what. Merrill doesn't need to be focussing on anything but having a good time right now. It's already lost billions upon billions of dollars, a CEO, the respect of John Carney and so on and so forth. What Merrill needs right now is Auntie Anne's. What Merrill needs right now is easy access to the LIRR. What Merrill needs right now is Tiecoon (never been in, but love the stupid name).

The Journal notes that the five-year renewal lease with Brookfield hasn't officially been signed yet, and the deal could still fall through. I'm hoping, but I'm not getting my hopes up. Anyway. This really depresses me. Makes me sad. Does it make you sad? Yeah? You wanna be happy? Yeah? Then I suggest you watch this. Segways always help.

Merrill to keep HQ at World Financial Center [Reuters]

The world has come riding to the rescue of Wall Street this winter, with sovereign wealth funds and similar government investment vehicles providing much needed cash infusions to banks and brokerages. Merrill Lynch got a Christmas present of $4.4 billion from Singapore’s Temasek and another $1.2 billion from Davis Selected Advisors. The details of the original announcement were pretty sketchy—lots of vague talk about financial and strategic benefits but very little financial details

Yesterday Temasek revealed some of the details in a filing with the Securities and Exchange Commission. Here’s the filing. And fortunately Matt Koppenheffer has done the math so we don’t have to.

According to the filing, Temasek now owns 91.7 million shares of Merrill stock. Based on the announced $4.4 billion initial investment from Temasek, the deal was priced at $48 per share -- an 11% discount to the stock price on the day of the announcement and an 8% discount from yesterday's price.

So Temasek started out with an 11% discount and now it’s down to an 8% discount. If John Thain is able to keep Merrill’s stock plummeting like it has been, eventually he may be able to bring Temasek’s investment up to par. It’s the new Wall Street math.

Temasek SEC Filing [SEC]
The Cost of Cash for Merrill [Motley Fool]

The much anticipated new round of layoffs of Merrill Lynch began this morning, according to people familiar with the matter. We hear that Merrill began firing people starting at 7 am on the trading floor. The deepest cuts have been concentrated in FICC. In all, 1,600 positions said to be on the chopping block.

“Packages suck,” says one of those familiar people. “Three months pay and a $25,000 bonus from analyst to MD.”

Of course, Charlie Gasparino has been reporting exactly the 1,600 figure since like last week and yesterday said the cuts would come today. Score another one for Chucky Gees.

The cute sounding spokeswoman for Merrill declined to comment and nearly put us to sleep by talking about how "material disclosures" would be made according to regulations about financial disclosures.

And you know what? I don’t think buddy boy’s drunk or making shit up this time. According to Gasparino, Merrill will start firing employees tomorrow, with the credit and bond departments most at risk. And they may also announce a $10 billion writedown. And the triumphant return of Stan O’Neal. And “Dinosaurs,” in syndication. As that's the most important piece of information in this post, you can expect that I will elaborate on that later.

Earlier: Please Say Charlie Gasparino Is Drunk And Making Shit Up, Please Say Charlie Gasparino Is Drunk And Making Shit Up

John Thain's plan to revive the fortunes of Merrill Lynch apparently involves undoing some of the slash and burn work of Stan O'Neal, who was widely criticized for forcing out some of the most popular executives at the brokerage. This morning the Wall Street Journal reports that he is bringing back former top bond guy Jeffrey Kronthal. J. Kro will be working as a consultant on subprime portfolio.

But here's where we have to get a bit personal, and for like the third time this morning depart from our usual royal we style. You see, J. Kro apparently got a standing ovation when he appeared on the Merrill trading floor yesterday, and not one of you shared this with us. Bess almost declared an all day blackout on Merrill news when she heard this. Trading floor action is one of the things we're supposed to be good at, lads and lasses, but we can only do this with your help. So, at least until Bess gets back this afternoon, we're not going to black out Merrill news. But you people had better fire up those emails because I don't know if I'll be able to talk her down from this when she gets back.

That said, the end of the Journal's piece on J. Kro's return reads like a help wanted ad: "John Thain, who became Merrill chief executive at the start of December, is seeking senior trading and risk-management executives to oversee the firm's trillion-dollar balance sheet."

Kronthal to Return As Merrill Adviser [Wall Street Journal]

It seems that the forty-percent bonus wipe-out we reported this morning is fast becoming the industry standard, at least for certain fixed-income groups. Merrill Lynch, which reported a $2.24 billion third-quarter loss and was forced to seek help from outsider investors, has given out orders to fixed-income managers to cut 2007 bonuses by an average of 40 percent, according to a Bloomberg report that hit today.

Of course, the bonus wipeouts won’t hit across the fixed income world equally. This morning’s report about the structured products group at JP Morgan showed a total 40% cut despite the fact that the group is not directly involved in mortgages. At Merrill bonus payments may drop by 80 percent for traders specializing in mortgage bonds and collateralized debt obligations, according to Bloomberg. Other groups, however, will not be immune. “Bonuses may drop 20 percent for interest-rate traders and 60 percent in the New York-based firm's corporate bond unit,” the people who gave Bloomberg this information said.

Merrill Lynch to Cut Fixed-Income Bonuses, People Say [Bloomberg]

Merrill Lynch has come to a final agreement to sell Merrill Lynch Capital to GE. An announcement will be made tomorrow.

Apparently moved by the inspirational words in his latest read, Chicken Soup For The Divorcée's Soul, Greg Fleming sent out a heal thyself missive to all employees today entitled "A new chapter at Merrill Lynch," after being convinced that some people might be weirded out by "Starting Over, Yet Again."

In it, Fleming, who, according to CNBC's Charlie Gasparino, everyone at Merrill hates, said: "While the markets continue to be volatile, and challenges remain ahead, and I have cried myself to sleep every night for what feels like a lifetime and for what? That two-timing asshole?, I have tremendous confidence in our long-term prospects...Our core businesses continue to perform well...[and] our strategy is fundamentally sound." Ooo, but then he felt the need to go and back up the bull shit with evidence, and not having the decency to make something up, decided to work with the facts at hand. Big mistake. What'd the Flemster go with? A correction from the Wall Street Journal about an article that said Merrill was taking its accounting cues from Enron. A correction. That was the big pump-up part of his speech. A correction.

"The Wall Street Journal simply should never have written the story that it did, which is why it agreed to issue a rare correction of a page-one story," Fleming wrote. "The control groups worked just as they are supposed to work here, and the Journal got it wrong when it suggested that Merrill Lynch had engaged in any improper transactions." Apparently no one from Bloomberg had gotten back to Greg about whether or not they have plans to issue a correction to the story that reported Merrill would be writing down $8.1 billion (and counting), which he thinks (and said as much in the voicemails he left), "Bloomberg simply should never have written." God-willing, he'll have gotten some sort of a response in time for Chapter Two.

Merrill tells employees its strategy is sound [Reuters]

Early this month, it looked like we were getting into another media driven financial panic. The chiefs of banks and brokerages had been toppled. The front page of the Journal reported that Jimmy Cayne likes golf, cards and maybe even a little pot now and then. And, on November 2nd, the Journal reported that the bank had "engaged in deals with hedge funds that may have been designed to delay the day of reckoning on losses." And just in case that was too subtle, the article drew a connection to Enron and Japanese accounting scandals.

Merrill's stock dropped after the story and the brokerage fought back. It pointed out that the story seemed to be riddled with holes, with anonymous sources making vague allegations. And now it looks like Merrill has won. The Journal has printed a correction.

This article was based on incorrect information that the Merrill Lynch & Co. had engaged in off-balance-sheet deals with hedge funds in a possible bid to delay the recognition of losses connected to the firm's mortgage-securities exposure. In fact, Merrill proposed a deal with a hedge fund involving $1 billion in commercial paper issued by a Merrill-related entity containing mortgage securities. In exchange, the hedge fund would have had the right to sell the mortgage securities back to Merrill after one year for a guaranteed minimum return. However, Merrill didn't complete the deal after the firm's finance department determined it didn't meet proper accounting criteria. In addition, Merrill says it has accounted properly for all its transactions with hedge funds.

We didn't exactly tell you so, but our Opening Bell sounded a skeptical note when the article was printed, as did Felix Salmon.

Corrections & Amplifications [Wall Street Journal]
WSJ Admits its Merrill Story was False [Portfolio]

Dow Jones’s Evelyn Juan reports that Winthrop Smith Jr., son of the Merrill Lynch founding partner of the same name, is planning a little party next month for firm alums in New York. Mostly because he’s spent the last couple of years holed up in Vermont (running Sugarbush) and “really, really needs to get out” but also because it’s time to start reminiscing about the days when Merrill still gave out bonuses and wasn’t a stupendous failure. John Thain’s been invited, as has most of Citi (in order to make the MER guests look good), but guess who’s name is decidedly not on the list? Starts with an ‘S’, ends with a ‘tanley O’neal’ (also: starts with a ‘t,’ ends with an ‘ech sector,’ and a ‘J,’ ‘ohn Carney,’ though he plans on crashing and I may even come with, because I love the Time Square Doubletree). The burn isn’t really that surprising, considering that Stan got the job Smith wanted, but it nonetheless chafes, according to a receptionist from the office of O’Neal proctologist, who violated a host of ethics rules when she snuck a peak at his chart and called us with the results. Stan is said to be planning his own Merrill reunion for the same night, to be held in the office space the board’s letting him use for the next 3 years. Who will go where? We guess it really comes down to a matter of preference—Smith will have a piñata, Stan will be jumping out of a cake naked and serving Chex Mix^TM. Which one would you attend?

“I am getting tired, really getting tired, of these golfing cocksuckers.” [2:45]

Earlier: Merrill Lynch Has Made A Terrible Mistake

Mr O’Neal may not have been a backslapper. But at least he played golf, a great Merrill tradition, and spent a lot of time schmoozing with clients and executives on the golf course. Mr Thain, unfortunately, does not play golf.

“I can’t play at all,” he said on Wednesday. “I never learnt.”

Thain gets into swing of running Merrill [Financial Times]

John Thain is widely respected on Wall Street for his intelligence and experience. He scores top marks for his term at the head of the New York Stock Exchange. His knowledge of the bond market, gained running Goldman Sachs mortgage bond desk, is seen as exactly what Merrill Lynch needs right now. Investors in Merrill were pleased enough to push Merrill’s stock price up more than four percent after the news of his selection to replace ousted CEO Stan O’Neal broke yesterday.

Despite all this, Thain is far from an uncontroversial choice. In interviews this morning, current and former Merrill Lynch employees criticized the choice of Thain. The word used most often was “shocked.”

“I was shocked that the board went with someone with no connection with Merrill’s culture,” one former senior Merrill executive said. Others voiced similar concerns.

[More after the jump]

Tim Sykes's new "hedge fund," Transparent Investment Management, lost $28 dollars yesterday, and is up $1,635 (13.71 percent) to $14,050 since its inception, nine days ago. TIM's founder Tim would also like to you to note that he's devoting fifteen hours a day to the market, another 4 to answering e-mails, and the remaining five to "miscellaneous pursuits," which he would like you to identify below.

Furthermore: http://www.youtube.com/watch?v=TCprlfJ2Mzc

And we’re back to Thain already.

Not that there was any doubt but it’s now official. Here’s the Merrill Lynch press release announcing that Thain takes the helm on December 1st.

"Merrill Lynch & Co., Inc. (NYSE: MER) today announced that John A. Thain, chief executive officer, director and member of Management Committee of NYSE Euronext, Inc. and former president and chief operating officer of Goldman Sachs Group, has been appointed chairman and chief executive officer of Merrill Lynch, effective December 1," Merrill said in a statement.

Full Press Release after the jump.

It looks like it's Merrill Lynch that is nabbing New York Stock Exchange chief executive John Thain.

The New York Post has just reported that Merrill is expected to announce that it has hired Thain to replace ousted CEO Stan O'Neal sometime this afternoon. Zach Kouwe, whose reporting has scooped the world on this story, attributes it to "people familiar with the matter."

An NYSE board meeting is scheduled for 2 p.m. today and an announcement could come after the market closes, sources said. The move is a huge coup for Merrill and board member Alberto Cribiore, who has led the search for a new CEO after O'Neal resigned on Oct. 30.

Kouwe also reports that Citi wanted Thain but he chose the smaller, more narrowly focussed Merrill instead. The Post describes this as a "snub" for Citi. NYSE Chief Operating Officer Duncan Niederauer is expected to land the top job at the exchange.

Citi Snub: Thain Going To Merrill [New York Post]

Update 12:32: The Wall Street Journal files its report also: "John Thain, CEO of NYSE Euronext, has agreed to take the top post at brokerage house Merrill Lynch & Co., according to a person familiar with the matter."

Update 12:39: Congratulations and thanks to all our readers who voted in this morning's reader poll, which correctly called that John Thain would leave the NYSE for Merrill. We're constantly gratified by the amazing accuracy of our polls, which have predicted everything from the level of Fed rate cuts to this news. We like to think we have the best informed, most intelligent readers but it's nice to see you guys prove it over and over again.

Update 12:50: So what happened to Blackrock chief Larry Fink, the man many thought would eventually be Stan O'Neal replacement? Did he turn the job down? Was the board's enthusiasm for him exaggerated? Some fear of subprime contagion? Loyalty to Blackrock?

Update 1:06: CNBC's Charlie Gasparino says that Fink was offered the job, but he spooked the Merrill board by demanding a full-accounting of Merrill's subprime exposure. This led the board to go in another direction, perhaps out of fear that Fink might turn down the job if the subprime exposure was too bad.

Update 2:01: The Journal confirms that the stock exchange will name
Duncan Niederaueras its new CEO.

Also: whoever takes over Merrill, and it'll probably be Blackrock founder Larry Fink, even though he's taking his sweet ass time deciding, is going to cut fixed income by 25 percent (mostly heavily out of the collateralized bond department). Investment banking and equities will remain intact, not taking into account the guys who will sober up long enough to quit for the greener pastures at E*Trade Financial. Sort of related: new guy? Has sort of an Elvis Costello thing going on? Says stuff like "give me the skinny, Charlie"? Do we have any (group) thoughts on him? I like his glasses, Carney thinks they're "just okay." You can go now.

Merrill's Next Top Man [CNBC]

*Let’s see if MER is as sensitive about the issue as BSC.

BlackRock Chairman Larry Fink, Merrill Lynch’s #1 pick for CEO, is said to be taking the next two weeks to decide if he wants the job nobody else will have, including Stan O’Neal, who the board supposedly tried and failed to rehire over the weekend, according to sources familiar with the situation (Carney’s uppers). Fink’s strengths apparently include the ability to stay up late, his proven track record at a pretty successful asset manager, and his mortgage market expertise, which, though it has never been a prereq for the job before, the board was like “eh, could be a good idea to look for” when it created the listing for the position on Monster.com. According to CNBC, one minor issue issue is Fink’s stake in Blackrock, because Merrill sells BLK funds, and which would be a conflict of interest if such things existed. Given what is rumored to be a huge propensity for $5 billion to $10 billion writedowns, Enron accounting practices, and the WNBA, Fink is expected to accept the job, though is still holding on to the pipe dream that he’ll be offered the stop slot at Bear (which would explain why the seriously uncool move of leaking the weed story to the Journal last week).

Fink Considers Merrill Lynch CEO Position [CNBC]
BlackRock CEO not aware of Merrill CEO candidacy [Reuters]

Shares of MER are down almost 9 percent and while there are a cornucopia of things to choose from in deciding what’s to blame for the plunge (an imminent $10 billion writeoff, the fact that nobody wants to be CEO of the place, the birth of Tim Sykes, etc), Merrill itself has decided to pin it on the Wall Street Journal’s allegation that the firm has modeled its accounting practices on those of the dearly departed Enron Corporation. And how are they dealing with the problem? By issuing a totally unconvincing statement, that’s how. Nobody puts Merrill in a corner it didn't already back itself into by being (maybe, maybe) con artists:

This morning, an article in the Wall Street Journal about Merrill Lynch & Co., Inc., relying on unidentified sources, speculated about inappropriate transactions that “may have been designed” to avoid write-downs that “might have been” required earlier in the year. The story is non-specific and relies on unidentified sources. We have no reason to believe that any such inappropriate transactions occurred. Such transactions would clearly violate Merrill Lynch policy.

On a related note, who's going to go for the hatrick on Monday and deny something salacious (but probably true) about them that the Journal's going to print? SAC would be the easy one, but what else can J dig up that we don't already know? That would be a story worth reading.

Merrill Lynch filed papers with the U.S. District Court in Manhattan today to sue someone who’s been posing as a MER manager and sending racist e-mails to black investment brokers and Al Sharpton. The not terribly inventive messages, which steal lines from Pulp Fiction and Don Imus, began appearing in mid-September, from a Hotmail account. They’re believed to be coming out of the Midwest, though the conspiracy theory that they may be the work of a recently dismissed CEO, who knew what was coming and thought it would be funny to make the company look bad, has not yet been ruled out.

Merrill Lynch sues to stop racist e-mails [AMNY]

It's almost too good to be true. But it is true. Goldman Sachs chief executive Lloyd Blankfein lives in the same building at Merrill Lynch's ousted chief, Stan O'Neal, according to some at New York magazine who reads DealBook. The address: 941 Park Avenue, on 81st street.

Thanks to a reader, we were reminded this morning of a story in Nassim Taleb's Fooled by Randomness about the hard working lawyer from Brooklyn. Although he's a success by almost any measure, he is the poorest member of his Park Avenue Co-Op, and feels lousy about himself. The anecdote is used to illustrate how happiness is not just attained through material success but is also based on relative comparison. Nassim's point is that over reaching in order to "keep up with the Jones" can lead to excessive risk taking for a trader.

Suddenly, Stan's obsession with Goldman's earnings is starting to make sense.

"Just imagine that psychological trauma!" our reader writes. "If only Stan had moved into Jimmy Cayne's building he would still be CEO of Merrill."

As Merrill Reels, Goldman Glitters [DealBook]
Hello, Blankfein [New York Magazine]

Oscar Wilde once said that a cynic "knows the price of everything and the value of nothing."

Today, as we spoke to sources in and around Merrill Lynch, our favorite line came from a Merrill veteran who cleverly turned around Wilde's line. According to the Merrill vet, the most common objection to giving Bob McCann the top spot--that he lacks fixed-income experience--should be regarded as a strength.

"Haven't we learned that a lot of these folks with fixed-income experience had no idea what they were doing? Didn't that just cost Merrill $8 billion. That's enough of that experience," he said. "The problem is that these guys know the alleged value of everything but the prices of nothing. Value without market price is pretty in poetry but ugly on Wall Street."

Speaking of which, we're supposed to be attending the Future of Business Media conference today at the Waldorf Astoria but we've been chasing the Merrill story all morning. We're heading back to the conference. Bess Levin is holding down the fort at DealBreaker's bunker HQ. Expect more from her shortly.

"They made money."

That's the reason that Bob McCann, the president of Merrill Lynch's massive global wealth management group, is still considered the top-running candidate to become the next chief executive by the rank-and-file of the company. He is considered a long-shot by outsiders—and perhaps by members of the board of directors—but he has strong support inside Merrill Lynch.

In a disastrous third quarter for Merill, McCann's brokerage saw a 23 percent surge in revenues, taking in $3.3 billion in the third quarter. The brokers took control of $26 billion in net new client assets, its strongest quarter in more than six years.

It's well known that McCann is immensely popular with the 16,000 brokers at Merrill. But his support is much broader than that. Across the firm, many believe that McCann may be the person who can lead Merrill out of its current morass. The greatest opposition to McCann appears to be in those areas where there is the most fear that the elevation of McCann might oversee a retrenchment. But many who work in the fixed income groups, for instance, already believe that their days may be numbered.

The brokers are already moving to put pressure on the upper-ranks of the company to name a chief executive quickly. They are spreading the word that the uncertainty at the company may be putting the brokerage business at risk, as investors wonder whether their money is safe with a company with a conspicuous void at the top.

Water-cooler odds makers are putting their money on McCann. They believe that eventually the board will come around to the view that it needs to re-invigorate the firm with a popular chief executive with support within the firm, and McCann fits that description nicely.

Larry Fink, the chief of Blackrock, is also widely admired and would be welcomed by many within Merrill. But many at the company believe that he may have already turned down the job, perhaps because he is unwilling to leave Blackrock or perhaps because he has been put-off by the apparent lack of consensus about corporate strategy at the board level.

The news that Merrill Lynch had not selected even an interim chief executive caught many by surprise. The official line—that Merrill is waiting to choose a chief executive while it reviews its corporate strategy—is being applauded by many as a sober, thoughtful approach. But it may indicate that even greater write-downs are coming at the company.

We've heard from a source close to the board of directors that at least one potential candidate indicated that he did not want to sign as a the new chief executive until after the losses from derivatives and credit markets had been fully reviewed and new disclosures about deeper losses, which many analysts believe will have to be made, are announced. Stepping into a job that requires as its first public act the announcement of even larger losses is not the "fresh start" that many executives would look forward to.

But it's more than a potential public relations disaster. There is the risk of legal peril in taking the top job. Merrill Lynch will soon be filing its quarterly report with the Securities & Exchange Commission. These will include accounting for the losses, and under Sarbanes Oxley a new CEO would have to sign a written statement certifying that the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the company. That's something a new chief executive might not feel comfortable doing.

After days of chaos inside Merrill Lynch—chaos that was felt from the board room to the water coolers—Stan O'Neal has finally been allowed to retire. Confusion still reigned this morning as people inside the Wall Street firm read media reports claiming Ahmass Fakahany, Stan O'Neal apparatchik who had a hand in overseeing risk management, was resigning and only hours later learned that he was being retained as a co-president.

Nonetheless, the widespread view within Merrill Lynch's rank-and-file is that Ahmass has been fired in every way that matters. It seems that he has been moved over to operations, and away from the more important businesses at the firm, including risk management.

The failure to name even an interim has left many at Merrill with a sense of unease. With November fast approaching, many employees at all levels of the firm are scheduled to receive quarterly performance and shortly after that should learn their bonus numbers. But talk of a "new strategy" at Merrill and a void of leadership at the top has many feeling that although the initial period of chaos as passed, there remains too much uncertainty at the firm.

Merrill Lynch has finally announced the departure of Stan O’Neal**, but is, adorably, referring to it as a retirement, effective immediately. Apparently O’Neal and the board agreed that “a change in leadership” was in the best interest of the firm, in its quest to, and this is actually what they said, “maintain the strong operating performance of it businesses which the company reported last week were performing well, apart from sub-prime mortgages and CDOs.” Alberto Cribiore, a managing parter and founder of the private equity firm Brera Capital, has been named interim non-executive chairman. Ahmass Fakahany and Gregory Fleming will remain as co-presidents and COOs.

According to a press release, Stan feels “very fortunate to spend the past 21 years at Merrill Lynch,” which we bet he really does. He’d also like to “thank all of [his] colleagues for their contributions and support…and wish them the successful future they deserve," as first-year analysts at Bear Stearns.

Stan O’Neal Retires From Merrill Lynch; Alberto Cribiore to Serve as Interim Non-Executive Chairman and Chair Search Committee [Merrill Lynch]

*Yes, we could delete the whole thing and pretend like it never existed by you know what? It did and we don't practice revisionist history at DealBreaker (backdating the time stamps on posts? Yes. We're only human).

**Just wondering-- what do you think Carney's going to do to himself when he finds out this happened while he was being otherwise detained?

Ahmass Fakahany, the Merrill Lynch co-president who, if you want to go there, might not have done the greatest job overseeing risk management at the firm over the last several months, is expected to resign shortly, following the ousting of his main man Stan. He probably won’t be getting a package even close to the one O’Neal’s leaving with, but as a reward for exiting stage left without much of a fight, will be tossed a few extra shares of MER, because, as one member of the board put it, “They’re basically worthless anyway, if you ask me. You want me to be honest? I’d swap all my Merrill stock for a few stacks of unmarked Mozilo Bucks if I had shady enough contacts to find them, and that grin didn’t scare the shit out of me.”

On a related note, Chief Financial Officer Jeffrey Edwards apparently offered to quit at some point last week, but was told "No, no, your punishment for the $8.4 billion is that you have to stay."

Merrill co-president Fakahany seen leaving [Reuters]
Merrill Lynch CFO Edwards offered to quit [Reuters]

Earlier this afternoon we asked if some of the guys at Bear Stearns might be smiling in the darker parts of their souls at the troubles—losses, snakepits, messes, ousting, disorganized succession plans—Merrill Lynch has been going through lately. Or, more likely, some of the guys who used to be at Bear Stearns, like former head of trading, equities, fixed income, energy and asset management Warren Spector.

We thought that maybe the guys who saw first their hedge funds and then their jobs go down the drain after a Merrill led rush of creditors started grabbing their assets—which, for all anyone knows now, might have turned out of have been worthless anyway—might be experiencing some joy at watching credit market losses take down some of the folks who took them down.

This afternoon Portfolio’s politics guy asks the same question but for a totally different reason. “If Stan O'Neal is out at Merrill, doesn't that offer some comfort to the likes of Warren Spector,” writes Matthew Cooper. “Merrill is a case of the guy at the top taking the fall. At Bear, it seemed like the number 3, Warren Spector, took the hit instead of James Cayne. Where's the fairness in that?”

We’re not sure that why exactly anyone would comforted by this. But whatever. Maybe that’s why we’re not writing about politics. But we’re not convinced that Cooper is right when he says that the “guy at the top ought to take the fall when things go so wrong.”

It’s not the first time he’s said it. Back in August Cooper wrote: “It's hard to see why the firm's chief executive, James Cayne, would summarily execute Spector but not take the rap himself. The Buck Stops Here, not there.” But we weren’t convinced that time either.

Cooper’s model is clearly a political one—although we can’t remember when the last time a top guy resigned after being disgraced by the activities of his underlings either. Well, we’ve heard about Nixon but that was a long, long time ago! And Nixon is not usually held up as a model of American leadership. So let’s say Cooper’s is a model an idealistic one that is rarely realized in reality.

It’s hard not to suspect that Cooper is trying for some sort of hobgoblinistic, liberal consistency. Liberals think Bush should step down or get impeached because of the activities of, say, Alberto Gonzalez. So that means everyone should step down when their underlings allegedly lead things off the rails.

But should Cayne go? The market, the business media and the rank-and-file if Bear is hardly clamoring for his ouster. There have been losses at Bear Stearns—and investors in those two ridiculously named funds lost buckets and buckets of money—but not on the scale of Merrill Lynch’s. And, perhaps more importantly, Cayne has left investors and employees with a feeling that he understands what went wrong and is acting to contain the damage. O’Neal failed this damage-control test, in part because he had made enough enemies who went for the kill when they scented blood. And that failure, more than anything else, appears to be what doomed him

That may not be ‘fair’ in some cosmic sense. But Wall Street is hardly a place to be if you want cosmic justice.

James Cayne v. Stan O'Neal [Capital blog, Portfolio]

This morning we credited Management Today, a UK publication we'd never heard of before this morning, with being the first to use the second part of Merrill Lynch's name as a pun for the ousting of Stan O'Neal. It came to our attention in the usual way such things do: they beat us over the head with it by reminding us that "O’Neal is one of the few African-Americans running big US companies" and describing Wall Street as "largely a white male preserve."

In case you missed it, we thought that with all that hand-wringing it was a little surprising a headline-writer would decide that it was totally great to make a clever pun about lynching Stan O'Neal. Or maybe it worked the other way around: they wanted to make the pun, so they decided to cover themselves with the hand-wringing. Somebody's over-compensating!

But we were wrong. As far as we can tell, the award/badge of shamelessness for the first lynching pun should have gone to Portfolio's pseudonymous Spin Blogger who calls himself Jack Flack. Yesterday, Flack's piece was titled "Merrill Lynch-Mob: How the Media Helped Fire Stan O'Neal."

We suppose that the function of the lynching pun in Jack's piece, like that in Management Today piece, could be said to be anti-racist. You see, he's accusing O'Neal's opponents of acting like a lynch mob. Or maybe he's accusing the media of being like a lynch mob. In any case, Flack is the first one we've found who somehow overcame the discomfort most reporters would have about calling the firing of one of America's most prominent black executives a lynching.

Merrill Lynch-Mob: How the Media Helped Fire Stan O'Neal [Spin Blog]

You think James Cayne and whoever he’s playing golf with today (maybe Ralph Cioffi, but who really knows) are having a good laugh over the fact that Merrill lost billions and Stan O’Neal is getting canned? A of all, because this is exactly the kind of thing that Cayne likes to laugh about (people losing their jobs, dogs being born with only three legs, feline leukemia) and B of all, because Merrill tried to get back at Bear this summer for telling Komansky to get lost during the LTCM bailout, by selling off its assets that were in the “enhanced” fund, hastening its ultimate collapse? Could be a stretch, but apparently the theory’s not too crazy for Rich Marin to blog about, which sources tell us he’s doing as we speak. And is it really that crazy to laugh, or at the very least send a few mean-spirited emails (which we’ll reprint later) out over the fact that the firm that tried to screw you for screwing it like a thousand years ago is now taking it up the tailpipe? The answer is no. Go on James Cayne. Today you have our blessing to yuk it up (but only because we’ll probably write something cruel though maybe entirely justified about you tomorrow. Starting with a possible involvement in SAC's ho'mone case, and a penchant for Kung Pao chicken, stories we're running with unless you call us before 5). Anyway, the rest of you, answer our question.

Almost everyone expected Merrill Lynch to make an announcement about the fate of its chief executive—and his replacement—before the market opened today. We actually worked the phones and our electronic mail messaging system over the weekend—no small task, considering that our weekend started with a voyage to Blackout Island on Thursday night and sailed through Friday Night Fights, too many Halloween parties, football all day Sunday and finally landed on the island of Red Sox nation Sunday night—on the premise that the board would want to resolve this thing soon rather than later.

And by all accounts, they do want to resolve it sooner rather than later. But chaos is reigning over at the Mothership. It's clear that the thundering herd is stampeding but no-one is sure where. One indicator of chaos has been their press office. When a firm has its act together, these people respond with the annoying precision of, well, corporate press officers. But they have to know the company line spin it off the reel and right now it's clear that they don't know it. Who is in charge? Who's getting tapped by the board? When? In our addled imagination, it's like that scene from airplane when the pilot asks the passengers not to panic. Your guess is probably as good as theirs is.

Speaking of which, who do you think gets tapped? Leave your nominations in the comments section below and we'll do a poll later this morning. Some of the more obvious candidates: A number of names currently under consideration are well known, including Laurence Fink (runs BlackRock, upside: well-liked by investors, downside: but may not want to step into a snake pit), Gregory Fleming (Merrill's co-president, upside: already in place, downside: board may want new blood), John Thain (head of NYSE, upside: Goldman minted leader, downside: Goldman minted leader), and Bob McCann (king of the brokers, upside: has a loyal following inside the Mothership, downside: may have too much of Stan's blood on his hands.)

Update 10:20 AM: Paul Kedrosky complains that the list of usual suspects of potential successor chief executives at Merrill consists of "gray and boring" candidates.

"What Merrill needs is someone better, someone with fresh ideas, someone more telegenic, someone with less subprime baggage .... hmmm, me!" he writes.

He adds that he has one qualification that most others seem to lack. "I have no specific ideas about what I would do at Merrill, so I have that blankness going for me, and I can promise with complete assurance that I wouldn't try to sell the company without asking my board first. What more could you ask for?" Kedrosky adds.

We'd nominate our Bess Levin but someone once told us that chief executives have to sign contracts with moral turpitude clauses, and just knowing the rest of DealBreaker's editorial staff probably disqualifies her.

You knew it was going to happen at some point. But now one publication has gone with it—the racially provocative headline that was screaming to be written but that no-one wanted to touch. Until now.

"O’Neal gets Merrill Lynched," the headline on England's Management Today reads this morning.

And just in case that was too subtle, Management Today says it that feels sorry for Stan O'Neal "particularly since O’Neal is one of the few African-Americans running big US companies."

"This obviously doesn’t give him any more right to hold onto his job, but it still seems a shame that the world of high finance – largely a white male preserve already – is about to get a little more homogenized," Management today adds.

If you want a slightly less salacious—if much more informative—take on the story of how Stan O'Neal ended up discovering that he had so few friends at the take, we suggest sticking to the more traditional sources. We know that's sadly boring and we apologize. Both use the word "mess" to describe the situation at Merrill.

The New York Times seems to have backed-off a bit from it's "scoop" from last week about that nonsense Wachovia merger. Don't get us wrong—that conversation between the top guy at Merrill and the top guy at Wachovia probably happened, and probably annoyed brokers at Merrill—but from the start it sounded like an ex-post facto rationale. It read too neatly: a clean story with a familiar storyline—rogue CEO—to explain the sudden turn against O'Neal in a way that totally cleared the company's board and didn't focus too much attention on recent losses. It was also a story that no-one else had, and obviously was leaked to the Times reporters by someone trying to leak it. (As Charlie Gasparino pointed out this morning, a lot of speculation is that "someone" in this case was king of the Merrill brokers, Bob McCann). In any case, the story was spinning like a top.

Today the Times adopts a more likely line: O'Neal had ticked off the thundering stampede of Merrill's brokers. "His fall is also a reminder of how dangerous it is to tinker with a firm's culture. Having declared the idea of a nurturing Mother Merrill passé, O'Neal has discovered how angry and powerful a spurned mother can be," Jenny Anderson and Landon Thomas writes.

Bloomberg takes as similar line, although you have to read it like you most Bloomberg stories—skip to the third paragraph to get the real lede. "To his predecessors, many of whom resented his penchant for getting rid of dozens of Merrill loyalists, the losses are a painful reminder of how much has changed at the brokerage they used to call 'Mother Merrill,'" Bloomberg's Bradley Keoun writes. (PS: It's not the reporters fault they bury the ledes. It's just that someone at the top has apparently decided that people need to be reminded each and every time all of what are now background deals to this story.)

The best line of the Bloomberg story comes from always entertaining Pun Ziegel analyst Richard Bove who calls Merrill "a snake pit with political infighting."

The Wall Street Journal broke out the big fonts today for their story, so it would be cruel to neglect Randall Smith's story. The Journal takes a different—and slightly more interesting—line: the cost of Goldman Sachs anxiety.

"Merrill Chief Executive Stan O'Neal would grill his executives about why, for instance, Goldman was showing faster growth in bond-trading profits. Subordinates would scurry to analyze the Goldman earnings to get answers to Mr. O'Neal. 'It got to the point where you didn't want to be in the office' on Goldman earnings days, one former Merrill executive recalls," Smith writes.

O’Neal gets Merrill Lynched [Management Today]
O'Neal Ouster Makes Mess of Maternal Merrill Lynch [Bloomberg]
At Merrill, the rise of E. Stanley O'Neal ends with a messy undoing [New York Times via International Herald Tribune]
O'Neal Out as Merrill Reels From Loss [Wall Street Journal]

Red Sox Win!: They're shipping up to Boston with the World Series trophy. Our friend Will Leitch at Deadspin said it best: "The Rockies did the best they could to make a game, or a series, out of it, but it just wasn't happening: The Boston Red Sox were not to be denied." We're not going anywhere Professor Thom's tonight but congratulations to all our lads and lasses up in the New York City embassy of Red Sox nation. (10.29.07)

Portfolio: The connection between the news media and back-room power-plays. (10.28.07)

[Editor's note: It is 7:55. And that's probably our last update for a while. Time to see if Colorado gets swept. Assuming the bartender at our local pub doesn't over-serve us, we'll check back in after the game. In the meantime, feel free to leave any updates in the comments section below or email us at tips@dealbreaker.com. If nothing new develops from the Merrill board tonight (which seems likely given the hour), we'll see you back here tomorrow morning. ]

CNBC: Merrill's board considered offering Stan O'Neal the position of interim CEO while they choose a permanent director. Sources close to the situation initially said that a member of the Merrill board would be named interim chairman. (10.28.07)

Bloomberg: The pile-on begins! Daniel Tully, who ran Merrill Lynch in the 1990s, calls firm's third-quarter losses "sickening."

WSJ: Stan has "decided to leave," according to familiar people! (10.28.07)

CNBC: Stan O'Neal "has been ousted as chairman and chief executive officer of Merrill Lynch that much is certain," reports Charlie Gasparino. (10.28.07)

Reuters: Blackrock boss Larry Fink says he's unaware that he's a candidate for the top spot at Merrill Lynch. That would make him the only one who is unaware. (10.28.07)

NYT: The Merrill board has reached a broad consensus that Stan will go, according to people briefed on the discussions. (10.28.07)

IHT: The price-tag of ousting O'Neal: $159 million. (10.28.07)

WSJ: O'Neal is expected to step down, according to someone familiar with the firm's plans. (10.27.07)

As we told you five hours ago, the board of directors of Merrill Lynch an unscheduled meeting today to discuss giving Stan O'Neal his walking papers. The Wall Street Journal is now reporting that those "people familiar with the matter" have confirmed that the meeting took place.

Merrill's Board Discusses CEO's Fate [Wall Street Journal]

Isn’t it nice to know that Stanley O’Neal didn’t have any trouble fitting in time to play golf while his firm was busy losing billions of dollars? Bespoke Investors notes that while the MER chief may be horrible at making money, he’s actually got the best handicap of all his peers, which can probably be attributed to the fact that he’s apparently a fan of the Jimmy Cayne style of management, wherein you play games instead of coming into the office, and has plenty of time to practice. Pretty cool that in the very near future, he’ll be able to stop faking sick whenever he wants to hit the links, seeing as how he’s probably going to be unemployed.

Stan O'neal Gets Better Under Pressure [Bespoke Investment Group]

Word is starting to spread that the board of directors of Merrill Lynch is meeting right now! At this point it's just a rumor so we decided to do some checking.

How do you check this kind of thing? Simple really. We called every single one of the members of the board of directors of Merrill to ask them about it. Of course, not one of them took our call. To a man—or a woman—we were told that the board member we were calling was unavailable.

Not exactly an official confirmation of the rumor. But close enough! We say they are meeting!

Stan O'Neal is having the best day ever. We're pretty sure he's getting ready to pull the old "I just got fired" thing that our little brother did back when the market crashed in 2001. You know, that's where you take your box of belongings and stolen office supplies into the bar and get everyone to buy you drinks because you just got laid off. (This worked so well to get free drinks for our brother that he has been doing this for about six years now.)

Wait. What were talking about? Oh. Right. Merrill Lynch. That's pretty much all we're talking about today. So, where were we?

Hmmm. Oh. Right. Again. We're back.

So the share price of Merrill is shooting up (we already made that joke) while everyone talks about Stan O'Neal getting the boot. And we're having one of those "dog that didn't bark" moments. Ordinarily, when the lads get to yapping like this, a company will officially say it "does not comment on market speculation" but someone "familiar with the situation" will tell that David Faber fellow to quash the rumor.

And you know what's not happening? There's no anonymous sources quashing the rumor. If Stan wasn't three steps from the door, someone would be giving a "not for attribution" denial about the rumor. But no one is. Dog not barking.

No. Really. Are we still writing about this? Yes we are. As it turns out, Stan O'Neal is still the chief executive of Merrill Lynch.

At least for a couple of minutes more.

But one thing that is clear is that investors figure the sooner he goes the way of a subprime mortgage originator the better. Shares of Merrill are up like 5.2% right now on the rumor that O'Neal is O'Outta Here. This is one of the brilliant things about the stock market: it totally lets you know when you've over-stayed your welcome. No sitting around drinking the third bottle of red wine and thinking you are totally entertaining.

Someone should tell Chuck Prince about this, though.

Oh. Please. When will it end? Remember when we used to write about a variety of topics? Like proxy access, Halloween custumes, Bank of America, chocolate, backdating and Bess Levin's nocturnal habits. That's so over. Now it's just Merrill. Merrill. Merrill Merrill.

Yes. We've got more Merrill on the brain. Our pal Charlie Gasparino is reporting that Merrill Lynch head honcho Stanley O'Neal has told "associates" (read: people who pretend they like you but are totally talking about you behind your back) that he's likely to be ousted as CEO in the coming days as the big brokerage firm's financial problems mount.

(See what we mean?)

Chuck G (who is totally unrelated to Flavor Flav and was never, ever in either Public Enemy or that band named for that shit that was going to kill us all in late 2001 but never did) says that John Thain and Larry Fink are in the running to run Merrill—despite their menacing names!

Also: hey. Enough with the halloween costumes. We're totally writing more stuff now. Look up here!

Update: That band was called Anthrax! Thanks anonymous tipster Hank Poll-Son!

Merrill's O'Neal Adieu By Weekend [CNBC.com]

Wow! Can we write about anything else? Apparently not. Yesterday was all about Bank of We Lost Your Money. Today it's all Merrill Lynch all the time this morning. MerrillBreaker.

Anyway, Merrill shares are shooting up like, uhm, Sid Vicious on a good night with Nancy. (Or should that be a bad night? Whatevs.) And what seems to be driving the buying is the speculation that Merrill could do that thing that might get Stan O'Neal fired. You know, merge with the company we used to think was pronounced "Watch Ova Ya."

But now Dangerous Dana Cimullica of Deal Journal is calling bullshit on the deal. According to Cimullica, the deal isn't happening. Why? It's over-determined!

• Wachovia top jock Ken Thompson may have chatted with Stan the Man, but he never took the issue to his own board. Hint: that means he doesn't think a deal is in the works.
• Thompson's totally worn out from merging with Golden West. Deals are hard!
• As it turns out, we still have anti-trust laws. And, apparently, people think that bringing the 15,000 strong thundering Merrill stampede together with Wachovia's 10,000 brokers might tick off people who work for the government and think they know how big a brokerage should be.
• Also, the world is heavily populated by Chinese people and Arabs! And a lot of them are rich. Way before Wachovia got in on this deal, those rich foreign types would totally be in there buying up yer sherz.
• Actually, that might be what's happeing right now! (Hey! This might mark the first time in recent memory that inexplicable market movements have been attributed to the Arabs. Michael "I banged the MTV chick" Lewis call you effin office.)

Why a Merrill-Wachovia Deal is Unlikely [Wall Street Journal]

So, as it turns out, Stan O'Neal might not be fired for turning Merrill Lynch into a subprime hedge fund. But he may be fired for talking to Wachovia about a merger without first consulting with Merrill's board. For reals!

"Facing billions of dollars in losses from the subprime mortgage crisis, Merrill Lynch chairman and chief executive, E. Stanley O’Neal, floated the idea of a merger with a large bank, a foray that angered Merrill’s board and could cost him his job, according to people close to the beleaguered Wall Street firm," New York Times hottie Jenny Anderson and some other dude report.

Why fire O'Neal over this talking out of turn thing rather than the massive losses? Pay attention! You see, the losses stemmed from decisions that board of directors of the bank approved. So they can't exactly fire Stan over that without admitting that they kind of suck too. But a phone call with someone at Wachovia that wasn't authorized by the board? That's it! He can totally be fired for that without indicting the board. The lesson: don't answer the phone. Ever. Ev.Er.

Actually, we're pretty sure this is such a cop-out that even Merrill's board couldn't really own up to it.

Merrill’s Chief Is Said to Consider a Bid to Merge [New York Times]

1. The whole firm hates him.

2. He took risks.

3. That strategy turned out to be a bad one.

4. He left the office early to go return some videotapes.

5. Posing for that picture.

Charlie also added a reason why O'Neal *isn't* (or shouldn't be) getting fired: because he tried to merge Merrill with Wachovia. And if he does get fired for trying to merge with Wachovia? According to Gasparino, "It'll be a bigger story than the Ping Jiang hormones deal." Not as big as Epstein and the tranny, but big, still. Robert McCann and Greg Fleming are the mostly likely candidates to take over.

Merrill's O'Neal Adieu by Weekend [CNBC]

Terrified that Merrill Lynch is serious about plans to build a $4 billion, 3 million square foot building across the street from Penn Station and abandon Eliot Spitzer et al.’s attempt to re-establish ground zero as a financial center, state officials are said to be “holding out hope” that the company’s current and future “financial situation will prompt it to reconsider leaving Lower Manhattan.” Though it will not be easy to beat Chief Executive Stanley’ O’Neal’s lifelong dream of working within walking distance of an Auntie Anne’s—regardless of the cost—, not to mention that of many a MER employee, which is easy access to the LIRR, the fourth quarter $4 billion writedown that CIBC analyst Meredith Whitney is predicting for the firm may do the trick. It’ll probably also encourage the board to take a second to ponder how great a job Mr. O’Neal is actually doing, and maybe even do a little recon on the names (via FaceBook, naturally) that have been proposed to take over (Co-presidents Greg Fleming and Ahmass Fakahany, GWM president Robert McCann, BlackRock founder Larry Fink, erstwhile BSC president and co-COO Warren Spector, and John Thain). They’ll probably just ruminate on that for literally just second though, and ultimately fire some lower-ranking-than-O’Neal official instead. But who?

Rumors Flying On New CEO [NYP]
Merrill Lynch May Write Down $4 Billion More, CIBC Analyst Says [Bloomberg]
Merrill Lynch Expected to Quit Downtown for Midtown [NYT]

One of the things that Merrill Lynch did to pare its losses in it’s disasterous third-quarter is to dramatically slash compensation costs. Merrill Lynch recorded just under $2 billion on compensation and benefits costs during the third quarter, about half of what of it said it spent during the same period a year ago and less than half of the $4.76 billion it recorded for second quarter of 2007. At the same time, the bank’s employment rolls have grown to 64,200, an additional 8,900 more than a year ago.

Now some of this might be simply accounting hocus-pocus, attempting to reduce costs so that their no-good, very bad fiscal quarter doesn’t look quite so bad. Indeed, Merrill admits as much when it says it may have to accrue compensation costs at higher levels in the fourth quarter. To the extent that this is true, they’re just using phony numbers, which is hardly inspiring in a bank that seems to not to have been too good about estimating losses.

But it’s a grim sign for investment bankers awaiting year-end bonuses. Indeed, it seems that Merrill bankers may lose out in the bonus race this year to colleagues at competing firms. Goldman, for instance, actually increased the amount it recorded for bonus and salary compensation this year.

Even the re-assuring noises the bank is making are, well, less than re-assuring.

“Merrill Lynch remains focused on paying its best performing employees competitively,' the company said in a statement. But apparently it believes it doesn’t have very many of these “best performing employees” this year.

Update: We're not sure if this will make our lads and lasses at Merrill feel better or worse. But here's news that white Merrill's compensation is shrinking, it's not shrinking as fast as earnings. That means the stampeding horde may get a larger portion of the smaller pie. But, of course, since the pie is smaller, the slice will still be smaller than last year.

Merrill Lynch cuts compensation in half [Thomson Financial via CNNMoney]

During this morning’s conference call to discuss Merrill Lynch’s $8.4 billion writedown and $2.24 billion loss, CEO Stan O’Neal, quite predictably, attempted to steal the spotlight and hog all the firm’s third-quarter glory by saying, "No one is more disappointed than I am," the greedy bastard. At the time, no one said anything like, “Now wait there one minute, bub,” not even Deutsche Bank’s Mike Mayo, but we’ve been thinking that actually, Stanley, you might not be the one who’s most disappointed in your utter and complete failure.

This is horrifying—the securities firm that just lost $2.24 billion in one quarter is now saying it may be reducing year-end bonuses. Never have we ever been so inclined to say, WTF, O'Neal? WTF. Oh wait, hold on: MER “remains focused on paying its best performing employees competitively.” So what all you Lynchies need to do is ask yourselves, “How much did I suck this quarter, and was it more or less than the guy to my right/left?” Should give you a decent idea about what to expect.

Merrill Lynched [FT Alphaville]

Finance professor and author of "100 Years of Wall Street" told Bloomberg, re: Merrill: ``It's safe to say this is the largest writedown' by a [U.S. securities firm]. The only other time we had such big losses was the third-world debt crisis in the 1980s. Even then, the losses didn't match this one.''

They said it was impossible but god damn it, Stanley O’Neal doesn’t know the meaning of the word. Yes, people, Merrill Lynch reported the biggest quarterly loss in the history of Merrill Lynch today following a $8.4 billion writedown. The $2.24 billion, $2.82/share loss was a whopping six times higher than the Lynchettes estimated on October 5. I’d never listened to a conference call before, not even the Global Alpha one, mostly because I think I’m too good for them, but I figured if there was ever a time to listen to a bunch of guys rationalize the way they put a bunch of money in a paper bag and lit it on fire, it was now. Plus, someone told me that Stan O’Neal would be making a rare appearance, and I wanted to see if he’d last any longer than 2-Minute Man Jimmy Cayne. Unfortunately, I was a little late getting into the office this morning, and didn’t plug my headphones in ‘til, oh, I don’t know, 10:38. Sure, the whole thing was being recorded, and if I wanted to, I could’ve listened to it from the beginning, but it’s like Carney always says, “Why bother?” So I’ll just tell you what I liked about the call from the time I started listening:

I Liked when:

- CFO Jeff Edwards pats Merrill Lynch on the back for providing “an extraordinarily high level of disclosure.”

- A Deutsche Bank analyst, Mike Mayo, says to Edwards, “Your peers didn’t take an $8 billion writedown.”
That’s a lot of ‘tude for a Deutsche Bank analyst, but then again, this is textbook Mike. Guy's not afraid to sound like an asshole when it comes to earnings (or lackthereof). LIKE IT. Understand it. Identify with it.

- Jeff Edwards calls Citigroup analyst Prashant Bhatia “son.” So dismissive. Don’t just like it, LOVE IT.

- A smoke alarm system test is heard over the Merrill Lynch loudspeaker. Everyone laughs, but if this were taking place in California, it probably wouldn’t be as funny, and it probably wouldn't be a test.

Merrill Lynch Reports Loss on $8.4 Billion Writedown [Bloomberg]
Merrill Lynch posts $2.3 bln quarterly loss [Reuters]

So Merrill Lynch beat the lower expectations it put out into the market yesterday by taking only $7.9 billion in writedowns for collateralized debt obligations and U.S. subprime mortgages. Of course that's much higher than the $5.5 billion write down they said they'd be taking a month ago, but this time they promise they really mean it. Some analysts are already saying they are confident that this time Merrill threw in the "kitchen sink" and won't be taking further write-downs. Which totally makes sense, because what are the odds they'd be spectacularly wrong twice.

The stock moved up as news of the much-worse-than-projected-but-not-as-bad-as-whispered losses spread. DealBreaker's Closing Bell, CNBC's Charlie Gasparino and the Wall Street Journal had all reported that losses would be higher than projected but it seems that the New York Times came closest to pinning the tail on Stan O'Neal. Tuesday afternoon it reported that Merrill was already expecting about $2.5 billion in losses on top of the $5 billion it had announced earlier this month.

And how did the Times come so close? Well, apparently, they came so close because Merrill told them wha the numbers would be. Or told someone who told the Times, which is pretty much the same thing. DealBook, the blog of the the Times business section, reports this morning. "And where did those figures come from? Merrill itself, via undisclosed sources."

And, actually, Merrill still managed to miss the number leaked to the Times. Or did things get $400 million worse overnight?

Both journalists and investors are now questioning whether Merrill Lynch has been...uhm, what's the polite word? Oh, right...forthcoming enough about it's losses. (The impolite way of saying it is that they seem to have been dishonest about its losses.) As Charlie Gasparino pointed out, when he was reporting three weeks ago that the losses would be worse, the bank's spokespeople did it's best to dampen that story and claimed that losses would be in line with the $5 billion it had put out a month ago. This morning on Squawk Box, Gasparino more or less questioned why anyone would want to start believing Merrill now given their past behavior.

Oh, and over at Market Beat, David Gaffen is listening to the earning's call so you don't have to.

And coming up in a few moments, Bess Levin gives us more...uhm, well, is "analysis" the right word? She gives us more of that thing she does but aims it at Merrill.

Earnings Release [Merrill Lynch]
Earnings Release [Merrill Lynch; pdf file]
Financial Spreadsheet [Merrill Lynch; Excel file]
Managing Expectations of Merrill’s Losses [DealBook]
Live-Blogging the Merrill Conference Call [Market Beat]

Beating out Deutsche Bank and UBS, which announced writedowns of $3.11 billion and $3.4 billion this week, respectively, was Team Merrill, marking down the value of mortgages, asset-backed bonds and leveraged loans at $5.5 billion. The bank projects that its moment of glory will translate to its first quarterly loss in six years, at a net loss per share of up to 50 cents. In a statement this morning, ML attributed the bad news to “an unprecedented move in credit spreads and a lack of market liquidity in these securities, which intensified during the third quarter.''

In September, the investment bank “hinted” at some problems having to do with credit when it reminded investors via a security filing that while it may be best known for its “retail” brokerage for individual investors, the firm had a decent amount of exposure to those areas of the mortgage markets of which we do not speak. (Apparently the last line of the filing, “So brace yourselves, and don’t say we didn’t warn you” was not meant to be a mixed message.) Merrill also may have been trying to tip us off to the imminent bad news on Wednesday, when it fired Osman Semerci, the bank’s global chief of fixed-income, and his number two guy, Dale Lattanzio, co-head of the division’s American operations.

Merrill Chief Stan O’Neal said that he and his employees were “disappointed in [their] performance in structured finance and mortgages.” He added that the writedowns were limited by "aggressive and effective risk management." Obviously not “too aggressive” or “too effective,” but “slightly aggressive” and “slightly effective,” one would guess.

Besides all that, Merrill noted that third-quarter revenue will rise at least 20% in its equity markets, investment banking and wealth management operations, and gave its full endorsement to David Sobotka, new head of fixed income, who has a “proven track record'' managing risk.

Merrill Lynch to Write Down $5.5 Billion in Credit Losses [WSJ]
Merrill Hints of Credit Woes [WSJ]

Merrill Lynch fired Osman Semerci, the bank’s global chief of fixed-income, in addition to his number two guy, Dale Lattanzio, co-head of the division’s American operations, today, following a writedown of about $4 billion and what analysts say will be the lowest quarterly earnings in nearly six years. Semerci will be replaced by David Sobotka, who has been head of ML’s global commodities business since 2004.

The firm declined to comment on the involuntary departures, though Gustavo Dolfino, president of executive search firm Whiterock Group LLC told the Journal, “They’re holding someone responsible. It was musical chairs, and everybody looked the other way, and the music stopped.” Dolfino, who has quite clearly never played Musical Chairs, declined to hazard a guess as to whether or not the firings had anything to do with Stan O’Neal throwing stones from inside of a glass house.

Merrill Selects Sobotka As Head of Fixed Income [WSJ]

Finding a new home is hard! Merrill Lynch execs engaged in a little bitching and moaning to the Post (who gloriously came up with the headline "For Merrill, Size Counts," because Q. Who doesn't love a penis joke? A. No one) today, re: its search for new Headquarters and it sounds, completely objectively, and not taking league tables into account, like it sucks to be ML. The options at the World Trade Center and World Financial center are "simply too small" and moving downtown would force the bulge to add a second building in Jersey City. And as someone who knows the Garden State, such an unseemly measure would not bode well for Merrill Lynch, which fancies itself a Goldman Sachs (more on that later).

What about the Hotel Pennsylvania spot, located across the street from Penn Station (which, let's not kid ourselves, many Merrill employees must, by the constraints of the commute, must pass through at least twice daily, anyway)? Not "attractive enough." (Stan O'Neal only cares about looks.) Furthermore, the property, owned by Vornado Realty Trust, requires "prolonged civic and city variances and approvals to be as large enough to fill the bank's needs—at least 3 million square feet with one large 80,000-foot trading floor" that are "too iffy."

Hudson Yards? Let's not get ahead of ourselves—the site's nowhere near ready, and, as a Merrill exec pointed out, he and his men "[are] not pioneers," or heroes, either.

Brookfield Properties and Silverstein Properties are reportedly vying for Merrill's affection, but are not winning any points with traders, who are asking for one big floor, so as to facilitate "eye to eye contact," as opposed to several smaller ones, which B and S are proposing. One source went to far as to call the head of Silverstein "insane," but maybe what's insane is beating the dead horse that is Goldman Sachs favoritism ("They put $600 million into our competitor's pocket…at a bare minimum, we know that . . . first and foremost, we are at a competitive disadvantage.") and not focusing on the task at hand? Who's to say.

We are reminded, of course, that things could be worse for Merrill Lynch—they could be JP Morgan, and stuck with a hideous eyesore of a building that is being proposed for the bargain price of $2 billion, and is practically begging for a terrorist attack.

We'd like to help out the Lynchettes, but the only other options we can come with are the soon-to-be-vacated Trump Casino in Atlantic City, and West Bushwick, which actually strikes us as perfect. Got any ideas?

For Merrill, Size Counts [New York Post]

The banks have won the first big show down with private equity.

Last night several news outlets, including the Wall Street Journal, reported that private equity giant Kohlberg Kravis Roberts has signaled a willingness to include a financial covenant for the bank loan portion of the $24 billion of debt needed to finance its purchase of First Data.

First Data was largely viewed as a test case for some of the biggest, and riskiest, of the highly leveraged buyout deals that are scheduled to close in the next few weeks and months. The banks had been asking the private equity sponsors of the deals for concessions on the terms of the financing, saying it was having trouble syndicating the debt due to recent concerns about debt levels by many investors.

At least it will be easy to get tickets for the Knicks.

Merrill Lynch is inching closer to a deal to relocate its headquarters to Midtown from Lower Manhattan. The investment bank, which has been headquartered downtown since its founding in 1914, has exchanged documents detailing a potential deal with Vornado Realty Trust to be the anchor tenant at a new office tower it plans to build across from Madison Square Garden.

Merrill Lynch is "trading paper with Vornado now" to relocate to a proposed 2.5 million-square-foot office tower at the site of the Hotel Pennsylvania, a real estate professional close to the negotiations said.

Merrill Lynch May Relocate to Midtown [New York Sun]

On July 17, a device containing confidential employee information, including yours (if you have an at ml dot come e-mail address), was reported stolen from a Merrill Lynch office. It remains at large. Today, someone from ML IT informed the Lynchettes about this breach of security. The writer of the “Personal Information Security Alert” sounded empathetic, but not contrite, which makes sense, since he presumably was not the person who stole the device, and has nothing to apologize for, unless he did, in which case he’ll be looking at the business end of a hissy fit courtesy Stanley O’Neal in due time. OT!

The device contains names, social security numbers, ML identification numbers and compensation data. It does not contain home addresses or birthdays, so you will not be getting a “Look Who’s 40!” card from your identity thief.

Merrill states that it is actively investigating the problem, so much so that it was too busy to get around writing this email until almost three weeks after the fact. Merilll had pegged the chances of the data being compromised at “extremely remote” and weren’t going to say anything about it, but caught a late-viewing of Live Free or Die Hard and figured it’d be best to fess up. Just in case it’s the beginning of the fire sale.

Here it is, people: We’re offering $100 to whoever can find the device and deliver it to us, so that we might use the information within to blackmail certain Merrill employees who’ve late become thorns in our asses (no names, for now, but here’s a hint: this ML GWM employee once sparred in an alleyway with Carney after a tiff broke out regarding who was next on stage at an open mic night in Bayonne, not far from the office where the object in question was stolen, coincidentally). And also so we can update our bonus bumper.

Letter of regret, after the jump

Merrill Lynch, apparently, in an effort to—get this—protect its clients. Papers recently filed in U.S. Bankruptcy Court in Manhattan reveal, among other things (like: Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Fund started taking a turn to negative town in early 2007, and by May began to suffer significant devaluation of its asset portfolio, resulting in a bunch o’ margin calls), that around June 20, Stan O’Neal’s Lynchettes threw their clients a bunch a bunch of life savers (butterscotch and wintergreen) and then sold off assets that were in the “enhanced” fund.

Lawyers representing liquidators in the case claim that “this resulted in further downward pressure on the relevant asset classes and a revaluation of the Enhanced Fund’s assets,” hastening the fund’s ultimate collapse. Translation: “Everyone knew these funds were just a train wreck waiting to happen, the question was, ‘when?’ If it weren’t for Merrill, it would’ve been, uh, later. Not ‘never,’ god no, but ‘later,’ as opposed to ‘earlier.’ We still would’ve failed, but, given adequate time to prepare, we probably could’ve come up with some more plausible lies about why.”

This just goes to show you that the nerve of some people can be truly astounding. It’s like, where does Merrill get off, trying to protect its own from drowning in a sinking ship. Who does Stanley O’Neal think he is, Jack Dawson? Stanley O’Neal could never be Jack Dawson (that homeless kid on Growing Pains maybe, Arnie Grape, definitely. Jim Carroll in The Basketball Diaries-- up for debate. How’s his layup? Don't answer that).

Bear Hedge Fund Sank as Merrill Protected Clients [Reuters via NYT]

Any women, minorities, Jews or otherwise handicapped people looking for work at a bulge-bracket bank? Might we suggest Merrill Lynch, where a NASD arbitration panel recently ordered the bank to pay Fariborz Todd Zojaji $1.6 million for firing him over the issue of being Persian? In addition to “sending [the Iranian broker] to a corner to eventually be terminated,” the panel stated that Merrill defamed Zojaji on public record (his Form U5), destroying “claimant’s ability to become employed in the securities industry."

Mark Herr, a spokesman for the Lynchettes said that the bank “regretted the panel didn’t view the evidence in the same light we did,” which is surprising, considering Merrill had registered with the Prejudice? That’s Cool, Whatever panel of arbitration.

This is the second time in a month ML has been caught with its hand in the cookie jar of Iranian hate. On June 27, the bank was sued by the Equal Employement Opportunity Commission for firing Majid Borumand, an analyst with the firm’s global markets and investment banking model development group.

You’ve actually got to hand it to the O’Neals. Where some banks might say, “You know what? We’ve been getting kind of a reputation for condoning sexual harassment and bigotry, maybe we should cool it on the hate for a bit, you know, just dial it down for the time being,” Merrill said, “No, if anything, let’s take it up a few notches and really call attention to ourselves. We’re going to make it work for us.” Next up: a writing utensil sex suit of our very own!

Fired Iranian broker wins $1.6M from Merrill [AP via International Herald Tribune]
U.S. Sues Merrill on Treatment of Muslim Analyst [DealBook]

Merrill Lynch avoided subprime shrinkage and posted a 19% gain in revenue and 31% gain in net income from Q2 last year, driven by the global markets and investment banking unit (GMI) and the fact that no one has had to mark-to-market subprime debt.

Merrill's GMI unit posted a pretax gain of 43% from last year, mostly due to international business, which makes up 61% of the unit's revenue and is growing much faster than the unit's domestic component. Equity market revenue and investment banking revenue posted gains of 15% and 41% respectively.

Merrill still has $750 million left in seized collateral from the Bear hedge funds, after auctioning off the only $100 million anyone would buy. Merrill's brilliant $1.3 billion acquisition of First Franklin Financial from National City just before the subprime market tanked hasn't come to bite Merrill in the posterior, since Merrill makes less than 2% of its revenue from U.S. mortgage activities. The Wall Street Journal reports that analysts didn't expect much subprime impact on Merrill's earning's this quarter.

Merrill's international expansion through foriegn investment and involvement in private equity deals have the bank shouldering more risk, but so far these areas have helped drive growth and provided diversification while other markets lagged.

Stan O'Neal's all about this revenue diversification, and is a little paranoid that the market has it in for him. While stroking his giant earnrection, Stan O'Neal touted Merrill's triumph through adversity this quarter, from the Wall Street Journal:

We delivered another strong quarter in a volatile and, at times, hostile market environment, a market in which people started to ignore the immortal words of my favorite band that is not Earth, Wind and Fire - Journey. Not me. Look at these results. These results reflect our revenue diversification, which makes possible strong performance despite uneven market conditions. We are, Merr-ill. We are, Merr-ill. Ad astra per aspera mother fuckers.

Merrill Lynch's Earnings Rose 31% in 2nd Quarter [Wall Street Journal]

When the indoor putting green became a necessary accoutrement to the chief executive office, everyone assumed that the “golf or work?” conundrum had been answered with a resounding “both.” But, as the Times reported recently, there is no tenable substitute for well-manicured sand traps and tree-lined fairways, even when your hedge funds are collapsing.

Yesterday, the Bespoke Investment Group blog posted the recent scores and handicaps of five CEOs: Stanley O’Neal of Merrill Lynch, Richard Fuld of Lehman Brothers, James Cayne of Bear Stearns, John Mack of Morgan Stanley and Lloyd Blankfein of Goldman Sachs. The Dealbreaker question of the day: is there any correlation between a CEO’s golf game and that other hobby, making money? Here are the results:

CEOs Ranked by Handicap
1. Stanley O'Neal (9.9)
2. Richard Fuld (10.3)
3. James Cayne (15.9)
4. John Mack (17.0)
5. Lloyd Blankfein (32.1)

CEOs Ranked by Percent Change in Stock Price This Golf Season
1. Lloyd Blankfein (+6.9%)
2. Richard Fuld (+3.14%)
3. Stanley O'Neal (-1.3%)
4. James Cayne (-3.49%)
5. John Mack (-9.86%)

Lloyd Blankfein, by far the worst golfer of the bunch who, on a really good day shoots under 110, pushed Goldman stock up nearly 7% since April. This could mean several things: while other executives hit the links, Blankfein is holed up in the office; his short game is only strong in the financial sector; or he is confused about how golf is scored. You decide.

The hauntingly empty lobby of Bear Stearns

Yesterday’s showdown over the fate of two big Bear Stearns hedge funds “marks an important test of the financial markets’ resiliency,” according to this morning’s Wall Street Journal. So the natural question is: how did the financial markets score? What does the report card look like on the day after several investment banks flinched from pushing these two funds over the edge?

If “Plays Well With Others” was one of the subjects being tested, several of the investment banks who were exposed to the losses at the hedge funds scored very well. JP Morgan Chase, Goldman Sachs and Bank of America all reached negotiated deals with Bear Stearns to limit their risk. Although the details are sketchy, it seems that these deals involve Bear Stearns buying back collateral assets the banks had seized, forestalling a need to auction them off.

Merrill Lynch didn’t score quite as highly in this category, and late yesterday afternoon proceeded with an auction of Bear Stearns assets it had seized. We’re told the auction met with mixed results. Some of the higher-quality assets with less exposure to the subprime market met fetched what the Journal calls “reasonably high prices.” Other assets—variously described as “sludge,” “junk in investment-grade clothing” and “immoveable objects” by traders we talked to—faired less well. The Naked Capitalism blog describes them as fetching “atrocious prices.” Deutsche Bank also seems to have opted to auction off its collateral rather than cut a deal with Bear Stearns.

But at a more fundamental level, the test may have revealed a foreboding weakness in the credit derivatives market. JP Morgan, Goldman and Bank of America are said to have pulled back from auctioning off the collateral because earlier feelers put out to potential buyers revealed that the assets they had seized would have “fetched so little in the market,” according the Journal. The idea is that if they had brought down the the Bear funds, the investment banks would have hurt themselves as well. As Alphaville puts it, "So the picture becomes clearer: eat, be eaten, eat each other, but stop before you accidentally eat yourself."

But something even more ominous also may have convinced the banks to reach a settlement a real market test for these assets—the CDOs rarely traded and are priced according to complex mathematical models—might have demonstrated that they were worth far less than they were valued at on the books of hedge funds and investment banks. This could cause a ripple effect, forcing re-valuations at many hedge funds that hold similar assets, and at the banks that lend to them.

“As its two credit focused hedge funds with about $20bn of highly leveraged assets are put on ventilators, there is real pressure in the market for the creditors not to sell the collateral for fear of undermining the value of the CDOs and other debt packages. As we all know, they are near impossible to price accurately, due to the nature of the underlying distressed assets, and if these CDO’s are valued downwards, then all hedge funds who own similar subprime assets will have to do the same and hey presto we have a falling market, more defaults and the house of cards comes tumbling down,” Finbar Taggit writes today.

In short, by flinching from auctioning off the CDOs, JP Morgan and the other banks that reached deals with Bear Stearns may have prevented what some feared would become the much heralded “systemic event” in which the collapse of one hedge fund brings down all the others. But the cost of doing so appears to be keeping the actual market values of many of these assets more or less financially illegible. And keeping markets and regulators illiterate when it comes to reading the risks of these products.

One trader we spoke to described the outcome as a “cartoon moment.”

“As long as Wiley Coyote doesn’t realize he’s run off the cliff, he won’t fall,” he said. “These guys don’t want to look down because they are afraid there may be no there there.”

Bear's Woes Test Markets' Mettle [Wall Street Journal]
Bear Stearns Staves Off Collapse of 2 Hedge Funds [New York Times]
Subprime sector hit by $1bn assets sale [Financial Times]
Bear feast - be sure not to eat yourself [FT Alphaville]

Merrill has postponed the auction of $400mm in assets it seized from the High-Grade Structured Credit Strategies Enhanced Leverage Fund at Bear Stearns, Charlie Gasparino of CNBC is reporting. Merrill and other major lenders to the fund, including Citi and JPMorgan, are in a feel-good asset management "pow-wow" with Bear this afternoon. The fund is expected to make its case that it has a plan to recover from it recent catastrophe in the subprime market.

An announcement on what will really happen to the fund assets is expected later today or tomorrow.

Merrill Lynch Switches Gears [CNBC.com]

In case you missed it this weekend, Merrill seized $400mm in assets from a Bear Stearns hedge fund and is auctioning them off starting today. The Ralph Cioffi led fund scrambled to avoid liquidation late last week, auctioning off over $4bn worth of bonds Thursday morning alone, culminating a protracted struggle to sell assets to stay afloat. The fund has sold $7bn worth of bonds since May and frozen redemption requests.

After the late-week scramble, the fund presented a 30-day asset sale plan to lenders that would ease future margin call pressure. Merrill wasn't convinced, issued a list of collateral securities it was owed and seized the assets. The bidding for these starts at noon today, and could cause ripples across the Street, depending on how the market values less liquid mortgage-backed securities.

The Merrill seizure could signal (finally) the end of the High-Grade Structured Credit Strategies Enhanced Leverage Fund at Bear, following the other, less drawn out, subprime fund blowouts like Dillon Read at UBS. The Bear fund originally raised $600mm in investor capital and borrowed $6bn from banks to bet the wrong way on the ABX.

A 'Subprime' Fund Is on the Brink [Wall Street Journal]

Investment banks like to make headlines by playing important roles in big deals. But publicity surely wasn’t what Merrill Lynch was after when it made headlines last week with it’s new sick-day policy. An internal memo announced that three sick days per year is acceptable but after that the company will start docking pay. More than eight is “unacceptable.” And nine days out is a firing offense. After it was reported on Gawker and DealBreaker, the memo quickly became a story on which the sun never set, showing up in the UK’s Guardian, the International Herald-Tribune, the Boston Globe, the Fort Wayne Herald Gazette, the Los Angeles Times. It even crossed the Pacific to appear in the Shanghai Daily.

Merrill’s flaks acted quickly to emphasize, well, anything other than the news that it has a policy of firing employees who are sick more than 2.4% of the year. Spokesfolks say the company permits three weeks of vacation time, four “personal days,” thirteen weeks of leave for hatching offspring (but only if you are the primary-care giver). Also, they say the policy is in keeping with policies offered by its rivals. (And, of course, none of the other banks are saying a word in connection with the story).

But there was no getting around the fact that the policy was a drastic change for Merrill employees, who were previously permitted to take as many as 40 sick days (provided they didn’t take more than 4 days in a row). Of course, 40 sick days is an awful lot but its not clear that Merrill’s employees were actually taking anywhere near that many. No doubt some employees abused the policy by “pulling a sicky”—as our Brit friends like to say. But in general, employees of US companies don’t use all the sick days they have available. “The average company offering the benefit provides 8.1 sick days a year. But workers on average only take 5.2, according to a survey by Mercer Human Resources Consulting,” Fort Wayne’s Herald Gazette reported.

So why the crackdown? As is usually the case with anything happening around Memorial Day, the summer beach share is to blame.

[After the jump, the implausible "the Hamptons made us do it" excuse.]

Donald Steinbrugge, former Managing Director and Head of Institutional Sales for Merrill Lynch Investment Managers (and, previous to that, a founding principal of Andor Capital Management) is starting a consulting and third party marketing firm for hedge funds, called Agecroft Parterns. Agecroft will focus on “large hedge funds located outside the United States looking for distribution in the U.S., large funds in the United States that are looking to increase their penetration into the institutional marketplace, and mid-sized, high-quality funds that are looking to significantly expand their asset base across all types of hedge fund investors.” AP plans to target pension funds, endowments, foundations, insurance companies, institutional consulting firms, hedge fund of funds and large family offices.

Former Merrill Sales Head Launches Hedge Fund Marketing Firm [FINalternatives]

Ben Weston, Chief of Merrill's hedge-fund development and management group, left the firm yesterday after two years. Weston primarily directed sales of hedge funds to clients. Merrill plans on further centralizing its hedge fund sales business, after rolling the dedicated fund of fund sales group into Weston's group last year. This follows the string of departures from IB hedge fund related divisions last week - with Bear Stearns losing Leonard Feder, co-head of prime brokerage, and Lehman losing fund of funds CIO Jin Park and senior marketing specialist Anoop Dhakad.

Dow Kim, co-president of the global markets and investment-banking group at Merrill, also left last week, to start a new investment firm.

Merrill Lynch's Ben Weston, Hedge-Fund Chief, Resigns [Bloomberg]

It’s not enough that people associate Merrill Lynch with branch managers trying to manage your assets out of a kiosk in the mall and throwing in a free 9-hole round at the local par-3 where they can tell you about all the revolutionary Merrill structured products that can return less than t-bills (before fees). Now, nine days sick in the calendar year will get you canned. From Gawker, who for some reason has a Merrill Lynch correspondent:

Attendance Guidelines (Effective May 14, 2007)
A good attendance record and demonstrated reliability is one attribute of successful performance and is expected of all employees. These guidelines are in place to enable managers to address and foster improvement when an attendance problem has been demonstrated.

Jim Cramer doesn’t want you to hate the game, or the playa. And in his column in the latest issue of New York, the “game” refers to making money; the “playas,” I-bankers (and I-bank CEOs, and, more generally, I-banks). Sure, you might be saying, why shouldn’t I hate the $54 million/year Lloyd Blankfeins and the Goldman Saches of the world? Not only are they terribly unhygienic, but they make more in an hour than I do in a month (or is that just us at DB? Don’t answer that) and I’m a jealous, small and petty person (to say nothing of my unresolved issues from childhood, which probably feed into the pettiness in a vicious, never-ending circle).

You’re saying that, right? Well Big J has the answer. If you invest said “playas,” you’ll get to be part of their “game” and your resentment will disappear because when you’re rich, you can buy the antidote to resentment. Another reason you shouldn’t hate these “playas” is because Cramer used to work for Goldman Sachs and never fails to mention this (or his relationship with Spitzer, which, let’s be honest, you really can’t blame him for, because Goldman Sachs is an incredible institution and Spitzer is essentially God’s special gift to the world and politics at large). Here are some other arguments for why you should cross Lloyd, Dick and Stanley off of your To Kill lists (hint: they all have to do with their outifts making you money, and Chuck Prince having less financial acumen than Cramer’s garbage disposal):

1. These guys are basically stay-at-home moms: underpaid and, more importantly, unappreciated.

Stop envying Goldman Sachs’ Lloyd Blankfein already. Don’t begrudge Bear Stearns’ Jimmy Cayne and Lehman’s Dick Fuld their millions. Let Merrill’s Stan O’Neal and Morgan Stanley’s John Mack get paid more than Croesus. You heard it here first: They deserve it. In fact, they deserve more than they earn now. Those five men are underpaid because they are about to make you very rich if you buy their stocks.

2. They will make you Kings of Great Neck, Dukes of Roslyn with Asset Management alone. And, not to brag or anything, but if you must know, Cramer predicted Asset Management would be a major money-maker YEARS AGO, before assets were even invented. Of course, no one at 85 Broad listened to him, just like they didn’t about gravity or 9/11.

On Wednesday, Morgan Stanley settled a civil suit with eight of its former female employees who alleged that the bank discriminates against women in terms of how they are trained, paid, and promoted. This was at least the second time since 2004 that the bank has found itself involved in a fracas with the ladies. Following the verdict, we sat down with Jan Tyler, one of the plaintiffs.

DealBreaker: So. Were you happy with your portion of the $46 million settlement?

Jan Tyler: I’m not allowed to say whether I was happy or not, according to Cyrus Mehri [one of the lawyers who represented the eight plaintiffs], who I hate.

DB: Can you blink me an answer?

JT: No. I will tell you this—I’m writing a book. Based on my experience.

DB: Interesting—a memoir?

JT: It’s going to be like a James Frey book [, A Million Little Pieces].

DB: So you’re going to make stuff up?

The results of yesterday’s “Which bank has the dirtiest working conditions” poll are in. Some of the results may surprise you, some may not. If you actually read what we wrote about Bear Stearns’s in-house cafeteria and its 42 health-code points violations, for instance, you won’t (or shouldn’t) be surprised to learn that it landed in the top three (and if you read the part about contaminated food and inadequate levels of personal cleanliness and are still stunned, don’t invite us over to your home any time soon). If you didn’t know, though, that the 85 Broad is basically one step away from a gas station restroom on the Garden State Parkway (going South), you might be a bit caught off guard to learn that the Kingdom also landed at the top of the list of shame (all that glitters is not gold, indeed). Let’s examine the cold hard (dirty, disgusting, scatological) facts now.

Crazy Mogul Tom Cruise has the bull by the horns, as it looks like Merrill will have to pony up $500mm to Cruise's United Artists because it couldn't find anyone batty enough to go in with Cruise on the deal. From DealBook:

Merrill Lynch may end up becoming a full partner in Tom Cruise’s United Artists, according to The New York Post. The Post reports that negotiations between Merrill Lynch and UA over a $500 million film-financing package are being held up because the investment bank is having trouble finding a partner for the equity portion of the deal and the bank may end up putting up the cash itself.

A song Stan O'Neal probably has on loop right now, sung by Troubadour Mogul Jonathan Coulton:

Merrill May Partner Up With Cruise’s United Artists – [DealBook]

-- KEITH HAHN

The last time we checked, the only reason to be envious of Lloyd Blankfein’s henchmen was because some of them were getting upwards of $100 mm in bonuses (and because B-fein had carried on a tradition instituted during the Paulson era wherein on Tuesdays and every first and third Friday of the month, the girls are on Goldman).

According to the WSJ, however, there’s a new motivation for keying doctored league tables into the Goldies’ cars: trading floor envy. The Masters of the Universe are in the midst of erecting a “gleaming new building in lower Manhattan that will feature six gigantic state-of-the-art hangar-size trading floors (72,000 square feet each, with room for more than 900 traders on each floor)” and a Jamba Juice. If you’re the sort of person who’s made jealous by that sort of thing, you’re not alone—the top BB-banks are going to great—desperate, sad, whatever—lengths to keep up with the Goldmans. Let’s take a look at the competition.

Lehman Brothers Holdings:
Mulling over a deal with Vornado to build a HQ and trading floors where the Hotel Pennsylvania on Seventh Avenue still stands, i.e. Penn Station/MSG adjacent. Good for those commuting into the city on the Midtown Direct already/can’t resist Auntie Anne’s. Bad for anyone under 40/more importantly, those with an aversion to the types of people who ride the LIRR (read: anyone who doesn’t ride the LIRR and even some of those who do. Self-loathing. You know how it is).

Merrill Lynch & Co.:
Also considering the Hotel Pennsylvania site, in addition to the new WTC area currently under construction. Lease is up in 2013. The clock is ticking.

J.P. Morgan Chase & Co.:
Talks with the Port Authority are “progressing but not a done deal yet.” The only thing we know about the Port Authority is that it’s a good place to pick up hookers…and with our analyst and associate attrition…you do the math.

Morgan Stanley
Has “talked with several landlords about spaces large enough for improved trading facilities, though its plans are unclear.” A spokesperson for Morgan declined to comment though we’ve heard that Robert Kindler will only entertain the possibility of venues large enough to host the Mergers and Acquisitions book party.

Wall Street Firms Vie To Expand Trading Floors [WSJ]

Gretchen Morgenson may have a new punching bag and her name is Merrill Lynch. Bloomberg reports that subprime losses could make Merrill bonds riskier than debt issued by Bear Stearns.

Merrill may have the most potential for losses from so-called collateralized debt obligations, or CDOs, that repackage bonds backed by mortgages, analysts led by Jeffrey Rosenberg wrote in a research note this week. "The relative exposure to Merrill is likely understated," Rosenberg said. Underwriting data "suggest Merrill Lynch has the most exposure of the brokers to subprime through the origination of CDOs," his team wrote.

Merrill arranged $46 billion in structured-finance CDOs last year, according to data in the BofA report. Citigroup was second, with $21.3 billion, and Bear was 10th, packaging $9.4 billion of the deals.

We can only imagine that the response from Bear Stearns, who was taken to task by Morgenson a few weeks ago for what she regarded as "dubious industry practices and even fraud," must be something along the lines of an off-color two-word phrase that we're too Victorian to print here. This news couldn't come at a better time—we hear Gretzky’s been looking to sink her claws into some fresh meat.

Earlier: Regards' Just Seemed So Impersonal

SUBPRIME RISK HIGH [Bloomberg via NYP]

Merrill Sex Case Yields Tough Battle, Puny Win [Bloomberg]

Harold Ford was once routinely referred to as an "up-and-coming" politicians. But up-and-comers are supposed to win hotly contested races. Ford lost in a race that the nabobs will always refer to as "controversial" at best and "dirty" at worst. But there is no getting around the facts: he lost.

But losing doesn't always mean losing, especially if you are a Wall Street friendly Democrat beloved by the media. Many Wall Street firms reportedly came calling after Ford. And the Democrat finally returned the calls of Merrill Lynch, where he has signed up to be a senior policy adviser and a vice chairman.

We may never know exactly why Ford felt he was called to Merrill Lynch above all others. But it wouldn't be a stretch that they came up with a few things that everyone else couldn't match. There's the title of "vice chairman," of course. And then the fact that Merrill Lynch is letting Ford keep an office in Nashville as well as New York City. (This keeps alive the possibility that he may return to politics and can't be accused of having totally cut-and-run from his home state when political tides turned against him.)

And then, of course, there is the money. Now for a man as bright and honorable as Ford, we're sure this wasn't the only deciding factor. But that $3 million pay check cited on "Page Six" today can't have hurt Merrill's chances of winning Ford over. A man's got to eat, after all.

We Hear... [New York Post]

Banks all over town are said to have been making like the infamous blond in the video above and imploring, "Harold, call me." Now we know that Merrill Lynch is the lucky suitor who finally got the call.

Since losing his re-election bid in a controversial race this past fall, Ford has been said to have been relentlessly courted by Wall Street. He was regarded as pro-business while in Congress. He's also said to be no slouch in the smarts department, sporting a law degree from Michigan and a bachelor's from Penn. He was also a regular guest on various CNBC programs.

Ford, just 36 years old, will be a vice chairman and senior policy adviser at Merrill. He's boing to keep offices in New York and Nashville, according to Bloomberg.

So, anyone want to guess what Ford's going to get paid? We've heard numbers from $1 million to as high as $10 million. Feel free to engage in speculation in the comments section below.

Merrill Hires Former U.S. Congressman Ford as Adviser [Bloomberg]

I like to think that I’m pretty well educated in the personal finance department. I opened a savings account a little while ago; I contribute to a 401k; and, for the most part, I drink only the cheapest of beers. Sure, I spend a bit extravagantly on shoes now and then, but what gal doesn’t ? (This is Carney, btw). So I’m not sure I really need Merrill Lynch’s services so much as maybe they need mine. But in case you’re not as well-endowed as me (still Carney here), give this a gander:

Merrill Lynch has plans to roll out a weekend financial educational session solely for women at some point during the year, according to Karen Klein, director of family wealth services. The firm has been running financial educational sessions, coined "boot camps," for the upcoming generation of ultra-high-net-worth clients for the last four years.

The boot camp idea stemmed from both client and wealth advisor requests for more educational offerings, which include a full composite of classes on how to handle an upcoming fortune. The spokeswoman noted that most clients are part of the workforce. The recent three-day session was held at Wharton, featuring Wharton professors and speakers from Irvine, Calif.-based IFS Advisors.

Merrill Plans Financial Boot Camp For Women [Dailyii.com]

Merrill Lynch CEO Stanley O’Neal’s alleged substance abuse problem (as alleged by myself yesterday) was validated this morning, when the bank reported a 68% swell in fourth quarter profits, resulting from record numbers in trading and underwriting stocks and bonds. Net income hit $2.35 billion ($2.41/share), up from last year’s $1.39 billion ($1.41/share). According to Bloomberg, O’Neal's "17 acquisitions in the past three years, bigger trading bets and leveraged buyouts pushed full-year revenue above the record set during the technology stocks boom in 2000.” Earnings were high enough to beat out Morgan Stanley, though not Goldman Sachs, which has got to sting. Expect some sort of a cry for help on O’Neal's part in the form of 8 new acquisitions next month.

Merrill Profit Rises 68% on Trading, Private Equity [Bloomberg]

Merrill Lynch is expected to announce a 28% rise in fourth-quarter net income tomorrow, to $1.78 billion ($1.88/share), bringing their 2006 profit to $6.9 billion, the highest since it was founded* in 1914. Here’s hoping, for ML’s sake, those numbers are on target, because erstwhile penny-pincher E. Stanley O’Neal's spending habits depend on them.

Merrill Lynch & Co. Chief Executive Officer Stanley O'Neal is making acquisitions at the fastest pace in more than a decade to catch up with Goldman Sachs Group Inc. in commodities and Lehman Brothers Holdings Inc. in trading mortgage bonds.

Merrill has spent more than $2.6 billion to purchase 17 companies since 2004, including last year's takeovers of mortgage lender First Franklin Financial Corp. and Denver-based Petrie Parkman & Co., which specializes in investment banking for energy companies. O'Neal told shareholders in November that he may make ``bolt-on'' purchases to expand Merrill's brokerage unit, already the nation's biggest.

O'Neal took advantage of last year's record earnings to invest in the fastest-growing parts of the securities industry. That's a reversal from 2002, when he took over as CEO and cut 20,000 jobs at the New York-based firm as stock markets slumped.

*by Amherst grad Charles E. Merrill, Class of 1908. Just sayin’. Also created by AC grads? Frozen foods (Clarence Birdseye) and the Dewey Decimal system (Melvil Dewey, Class of 1874). Don’t act like you’re not impressed. You’re not? Five words: the father from “7th Heaven.”

Merrill Makes Acquisitions at Fastest Pace in Decade [Bloomberg]

Despite telling U.S. District Judge Kenneth Karas that he was “sorry” for leaking somewhat important information to Goldman Sachs employees Eugene “Dance like nobody’s watching” Plotkin and David Pajcin, former Merrill Lynch analyst Stanislave Shpigelman will soon be heading to the big house for three years and one month. Shpigelman admitted that while working in Merrill's M&A division, he took part in "a scheme that used gabby investment bankers and leaked copies of a market-moving magazine," facilitating others in making in excess of $6.7 million between October 2004 and August 2005. Impressively trumping the fact that the judge felt the need to note that he doled out the sentence with "a 'heavy heart' because Shpigelman had one of the nicest families he had ever known," is the fact that Shpigelman was recruited for the scheme by Plotkin and Pajcin "in a meeting at Club 88, a Manhattan day spa and Russian sauna," according to the S.E.C.

Ex-Analyst Gets Prison [Forbes]
Ex-Merrill Analyst Gets 37 Months in Insider Case [Bloomberg via Dealbook]

Earlier: Urban Grand Daddy

A steamy video of Merrill Lynch banker Renato Malzoni and Brazillian supermodel Daniela Cicarelli may get YouTube shut off in Brazil.

A Brazilian court ordered the popular video sharing service YouTube, a unit of Internet search provider Google Inc., to be shut down until it removes a celebrity sex video from its site, a judicial clerk said on Thursday.

Daniela Cicarelli, a model and ex-wife of soccer great Ronaldo, sued YouTube after a video of her apparently having sex in shallow water on a beach with her boyfriend was posted to the site.

For days it was the most viewed video in Brazil.

While you no doubt deplore this as much as we do, we're sure that for purely informational purposes you'll want to know if the video is still available on YouTube. And, well, we can't say for sure. But we couldn't find it. And we definitely tried.

But you know where we did find it? Oh, that's right. Through this link in the DealBreaker archvies.

Brazil court orders YouTube shut on celeb sex video [Reuters]

Merrill Lynch & Co. Inc. (NYSE: MER) inked a long-term lease extension and expansion in the Colgate Center, at 101 Hudson St. in Jersey City, NJ. The international wealth management firm now occupies 236,350 square feet within the 42-story, Mack-Cali Realty Corp. (NYSE: CLI) office tower.

The 1.24 million-square-foot, Class A building sits in the Hudson Waterfront submarket directly across from Manhattan.

We almost didn't even open the email tipping us off to this because it contained the spamerific words "extension and expansion." Remember, you can send your tips to tips(at)dealbreaker(dot)com. We're really good at keeping your identity secret.

This weekend saw a flurry of stories and rumors about whether Merrill Lynch, one of the largest employers in lower Manhattan, might relocate its headquarters outside of the city. Crain’s was the first media source to report on Friday that Merrill was mulling the move.

Subsequent reports raised doubts that Merrill was seriously considering moving out of New York City. One rumor was that the report was spread by Merrill’s real estate negotiators seeking subsidies from the city. But when Mayor Mike Bloomberg publicly and emphatically denied that the city would subsidize a new deal for Merrill, that possibility seemed to fade.

So what’s really going on? Is Merrill leaving? Well, it’s always a possibility. But it seems more likely that Merrill is using both stories—the possibility of moving and the unavailability of subsidies from the city—to negotiate a better deal for real estate on the World Trade Center site.

Keep in mind that these stories are based on analysts estimates. We’re hoping to see some real (or at least rumored) numbers soon, and we’ll start updating the numbers as soon as possible. (Email your tips to us here with the subject line “Bonus Watch. The identities of all tipsters are kept anonymous, unless you are retiring or something and want some credit for your work.)

The New York Daily News has the short version of the Bloomberg story:

Never in the history of Wall Street have so many earned so much in so little time.

Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Bros. and Bear Stearns are about to reward their 173,000 employees with $36 billion of bonuses.

That's a 30% increase from last year's record, and it doesn't include the billions more that will be paid by Citigroup, Bank of America and J.P. Morgan Chase, the three largest U.S. banks, as well as the hundreds of hedge funds and private-equity firms that constitute the financial industry.

The longer version gives estimates for individual firms.

Average compensation/average bonus (U.S. dollars):

Goldman $658,946 / $397,707

Morgan $257,594 / $154,556

Merrill $291,139 / $174,683

Lehman $351,160 / $210,696

Bear $338,462 / $203,077

And DealBook says that traders will once again reap the largest rewards.

On Wall Street, it will again be the traders, who make investment bets for their firms, and those who operate in the complex world of structured products and derivatives, who take home the biggest checks this year, with top-end estimates in the range of $40 million to $50 million, according to The New York Times.

“Traders are making more than bankers and that will probably continue for one more year,” Alan Johnson, the managing director of Alan Johnson Associates, told the Times. “Then it will be a horse race.”

36B seen in bonuses at top firms [Bloomberg in Daily News]

Wall Streeters to reap record bonuses [Bloomberg in Globe & Mail]

Wall Street Set for Bountiful Bonuses [New York Times]

Guess who isn't getting invited to Martha Stewart's pumpkin carving party this year?

Peter E. Bacanovic, his gall rising, could not believe it. But there it was in print. “I honestly don’t remember exactly what I was prosecuted for,” Martha Stewart is quoted as saying in the September issue of Harper’s Bazaar.

“It’s a very striking comment to make, I mean she is on probation,” Mr. Bacanovic said of his former friend, client and fellow convict, as he sat down for lunch last month at Sette Mezzo, just around the corner from his Manhattan town house.

“I was indicted not because I was the biggest criminal on the block or the biggest insider trader in history,” he said. “I was indicted simply to bring a case against my celebrity co-defendant. I was a device.”

His grievances [for Stewart] are many. They range from not being among those who received a Christmas card from her while she was in prison, to her legal strategy. He claims that she turned down offers from the government to settle charges, which would have resulted in no trial and perhaps no prison term. He also blames her for the $75,000 fine he recently paid to the Securities and Exchange Commission to settle insider trading charges.

Mr. Bacanovic’s feelings for his former client are complicated: there is resentment fueled by what he sees as the unfairness of his lot relative to hers, yet one that is tempered by warm memories of their shared love for chow chows and of Christmases spent together in the kitchen of Ms. Stewart’s home in Westport, Conn.

The Broker Who Fell To Earth [NYT]

Merrill Lynch and Bear Stearns have each committed to provide the family that controls Cablevision with one-half of the $12.4 billion of debt financing the acquisition of the cable company, according to a letter filed with the SEC yesterday.

Of course, it’s not quite accurate to say that the money is being provided to the Dolan family. The actual borrowers are Cablevision and a series of shell holding companies who secure the loans with Cablevision stock and assets. That’s leveraged buyout magic—buying a company with money you don’t have and collateralizing the loans with the company you don’t own.

The competition to be the lead lenders on the deal was most likely intense, with at least a handful of banks submitting letters to the Dolans. The Cablevision assets are very valuable as collateral and the fees attached to loans of this size most likely quite large. One surprising aspect of the winning Merrill-Bear Stearns letter, however, is that it retains a full-throated due diligence “out”—a provision allowing the banks to refuse to lend money if their due diligence investigation turns up serious problems with the company. In heavily sought after deals, this language is often watered down.

Unfortunately, the real red-meat of the deal is not disclosed. We’re talking, of course, about the bank fees and interest rates. These don’t get disclosed because they are not considered relevant to public investors in a going private transaction. Since the public shareholders are being bought out, they don’t have any economic interest in knowing what fees and interest rates the private company will be paying. So the fee letter gets kept under wraps.

Project Central Park Credit Facilities Commitment Letter [SEC]

Dolans Obtain $12.4 Billion for Cablevision Buyout [Bloomberg]

Merrill topped Bloomberg’s analysis of analysts, making sixty-eight winning calls on stocks in the two year period studied. Behind Merrill were second ranked UBS, third place Credit Suisse, fourth Morgan Stanley and fifth Deutsche Bank.

Even all those correct calls haven’t brought analysts back to their internet boom glory, however.

"The age of the rock star analyst is gone,'' says Browning, who spent 18 years covering airlines at Merrill Lynch, Oppenheimer & Co. and Wertheim Schroeder & Co. before rising through the ranks. "The age of the alpha-generating analyst is here.''

The rock stars had more fun. These days, analysts are working harder for less money. Pay -- which had poisoned the system because analysts' compensation was linked to investment banking work -- has been cut almost in half.

Senior analysts now earn about $600,000 a year, down from $1 million in 2000, says Alan Johnson, managing director of Johnson Associates Inc., a New York-based compensation consulting firm.

Merrill, UBS, Credit Suisse Prove Most Accurate Choosing Stocks [Bloomberg]

Following last week’s announcement that he intends to buy more shares of General Motors, Kirk Kekorian has asked the General Motors board to hire an outside consultant to assess a possible alliance between GM and Renault. Even board members who aren’t enthusiastic about the alliance may support hiring an outside consultant, if only to hold off possible shareholder lawsuits if an alliance doesn’t come to fruitition.

In other news, General Motors may have fired Danielle Cicarelli as a spokeperson following the release of a video of the MTV personality getting a bit freaky with her boyfriend, a Merrill Lynch investment banker, on a Brazillian beach. Somehow this doesn't seem like the kind of mistake Carlos Ghosn would have made.

GM board to consider Kerkorian suggestion [Washington Times]

A couple of our readers complained that they were being deprived of the Merrill banker getty down and dirty on the beach with Daniella Cicarelli video because their firm blocks the website hosting it. So we're embedding it right here for even easier access. We apologize in advance for the terrible soundtrack.

One thing we noticed on our second viewing is that Daniella seems to be wearing the same bathing suit bottom in the video as she is in the picture we linked to below. Shouldn't her investment banker boyfriend spring for a second suit?

Our first thought on reading that Stanley O’Neal, CEO of Merrill Lynch, was going to be deposed in a discrimination case brought by a black employee in the bank's Nashville office was: huh?

If you were bringing a case alleging racial discrimination, would you really want to bring attention to the fact that the CEO of the company you are suing is black? Or that the company you are suing is the only major Wall Street firm lead by an African American? Seems kinda like a bad idea.

Our second thought: pure effin genius.

O’Neal joined Merrill in 1986 as a vice-president and undoubtedly must have encountered some bigotry in his time there. As hard as it may be to understand in this age of mandatory diversity training and affirmative action, in 1986 we were less than twenty-years away from the passage of the civil rights act. There were still a lot of people working at the bank who could remember the days when racial discrimination was not only legally honky-dory but actually mandatory in some parts of the country.

This is speculation. We have no idea whether O’Neal personally encountered discrimination at Merrill. We do know he is on record as not being satisfied with the progress of diversity at his bank. And this itself might be useful to the plaintiff, George McReynolds. After all, if progress has been slower than the CEO would want, it definitely opens the question: how come?

So bringing in O’Neal to testify may be a very, very good idea.

Merrill Lynch CEO to Give Deposition [Associated Press in the Houston Chronicle]

Underneath the financial maneuvers and corporate wrangling in Lakshmi Mittal’s bid to have his Mittal Steel purchase Arcelor, the world’s second-biggest steelmaker, a smaller, more human and perhaps almost biblical battle between two brothers.

Michael Zaoui and his younger brother Yoel are both successful investment bankers who lead the European investment banking divisions of different banks. Michael leads at Merrill Lynch. Yoel at Goldman Sachs. Both were born in Morocco, lived for a time in Italy and educated at elite French schools. Both are French nationals.

The Mittal takeover of Arcelor saw them pitted against each other. At Merrill, Michael was in charge, with Michel Antakly, of Morgan Stanley’s efforts on behalf of Arcelor, which sought to defend itself against Mittal’s advances. At Goldman, Yoel helped arrange Mittal’s attack.

We’re still awaiting word about exactly how Yoel is celebrating this triumph over his older brother. But we're told that their last name, Zaoui, is indeed pronounced "Zowie!"

According to the British business news blog HereIsTheCity, a group of Merrill employees have been fired or suspended for forwarding pornographic emails from their work computers.

Merrill Lynch is said to have fired 13 employees in Dublin last week for alleged e-mail abuse. The firm is also said to have given written warnings to an additional 7 staff, who were sent home from the office following an inquiry.

According to press reports, two staff members were previously fired after they allegedly sent a por.ographic e-mail to a client. The latest sacking are believed to have resulted from a subsequent wide-ranging review of staff e-mails. The 13 staff who were been given the boot last week (both men and women) will have the right of appeal. The 7 who received written warnings will be required to undertake retraining on internet and e-mail practices.

Which brings us back to that potentialPlayboy LBO. If you can get canned for forwarding racy emails or looking at porny websites, how is anyone ever going to be comfortable raising money for a deal involving a girly-magazine and its internet properties? Or is there a "deal related porn only" qualification to the company policy.

Top Firm Fires Staff After Alleged E-Mail Abuse [HereIsTheCity]

Both the Wall Street Journal and the Financial Times reported today that Robert Zoellick may jump from the goodship Bush Administration for a post at a Wall Street firm. He's been spotted at Merrill and Goldman. Supposedly Zoellick is disapointed that he hasn't been offered the job as Treasury Secretary.

This makes sense. But there might be a simpler answer. Look at the shape of this administration. Would you stick around until the bitter end?

Zoellick Would Leave State If Passed Over for Top Treasury Job [Bloomberg.com]

Registered Rep mag profiles Mark Theirman, a class action lawyer (it's Class Action Day at DealBreaker) and ginormous Star Wars fan who is bringing suit against several large financial services firms for failing to compensate brokers for overtime work:

Thierman is now bringing his legal campaign east, with about 35 more class-action lawsuits, including some in New York, New Jersey and Pennsylvania. The list includes nearly every firm you'd expect, and then some: A.G. Edwards, Bear Stearns, Merrill Lynch, Morgan Stanley, Smith Barney, Edward Jones, Wachovia Securities and Raymond James & Associates. Thierman estimates that the suits represent about 100,000 brokers, past and present.

Wall Street Wage Fight [RegisteredRep.com]

Maybe we're just gettin' old, but kids these days are doing things earlier and earlier. Used to be, you didn't get arrested for insider trading till you were in your mid 40s or so. Now it's 29, 23 even:

Stanislav Shpigelman, 23, an analyst with Merrill's merger and acquisition division, gave secret information on about six pending takeovers to Eugene Plotkin, 26, an associate at Goldman's fixed-income research unit, and former Goldman analyst David Pajcin, 29, according to a complaint by U.S. Attorney Michael J. Garcia unsealed today. Pajcin, previously arrested for insider trading, is cooperating with Garcia's office.

Noting that the merger market is heating up and that there are "still some people out there motivated by greed'' he said that "memories of the industry in some cases seem to be remarkably short.''

"There Was a Discrepancy With Reality" is not the best thing we've heard all week. The best thing we've heard all week is analyst Jeff Harte's explanation of Merrill Lynch's $1.2 billion Q1 non-cash charge:

"At first glance $1.2 billion is a startlingly large number," said analyst Jeff Harte of Sandler O'Neill & Partners LP. "However, we remind investors that the charge represents early recognition of expenses that would otherwise have been recognized in future periods, as opposed to the creation of a new expense."

He's right, but $1.2 billion is a startlingly large number at second glance, too.

Merrill Lynch Shares Down After Charge [MSN]

The Festus and Helen Stacy Foundation has filed a claim charging TH Lee Putnam Ventures and Merrill Lynch Alternative Investments with inflating the valuation of their portfolio in reports to limited partners:

For example, even though 11 of the 37 companies that TH Lee Putnam had financed were shut down or had been written off completely, Merrill Lynch disclosed in its performance reports that the remaining 26 companies retained 91.8% of their value, the foundation's claim says. Wendell Bird, the attorney representing the Stacy Foundation, said it's unlikely that those 26 companies would be performing so well, while the other one-third were worth nothing at all. "There was a discrepancy with reality," said Bird...

Maybe we're cynical but we always assumed VC portfolios were inflated post-boom. We used to multiply total value by a percentage and refer to it as the "Limited Partner Discount Rate."

At any rate, "there was a discrepancy with reality" is the best thing we've heard all week.

Says The Accidental Consultant:

It is not just the Private Equity firms that have an interest in inflating values. The largest clients of the PE firms do as well.

[DJ/VentureWire via The Accidental Consultant]