Merrill Lynch

A month ago Zero Hedge speculated that the SEC was preparing to throw Wachtell Lipton and Ed Herlihy at the wolves, in case its planned settlement to indemnify Ken Lewis of all sins failed. Well, it failed, now that a jury trial is in the works to determine just how guilty Ken Lewis et al have been of shareholder fraud. And, as expected, Wachtell Lipton is about to be run over by a 200 ton freight train.

In January, Zero Hedge wrote about the bankruptcy of paperboard and packaging company Smurfit Stone Container Corp. As this occurred at the peak of the post Lehman crunch it was not very surprising. However, what is somewhat surprising is our recent encounter with a case study of the Jefferson Smurfit Group LBO by Morgan Stanley, in which Madison Dearborn acquired JSG for €2.3 billion, and subsequently spun off SSCC to the public. What caught our attention was the fees and expenses that the advisors charged MDP to facilitate a deal which ultimately cashed out the investor group by spinning off the eventual toxic assets of SSCC to a hapless public: Deutsche Bank and Merrill Lynch pocketed a whopping €248.5 million (yes, that's Euros). And for what: presumably for M&A fees, Loan fees, HY Bridge and Bond Fees and FX/Hedging Revenues. What they missed to point out is the primary reason for MD's generosity: extracting all the relevant assets out of a formerly stable and growing, operation, spinning off all the shitty ones (eventually attempting to arrange restructuring fees and/or DIP financing on the remaining SSCC husk), leveraging the company with a massive debt load, and subsequently IPOing into the next bull market.

Merrill Lynch (excuse me, BofA/ML as they like to put on the lead left side of REIT prospectuses), presents its case for why optimism dominates and all theories voices by perma-bears "have little founding in economic theory or history." What is notable from the below multi-pronged perspective on the definition of the term "recession" is that BofA/ML's entire argument rests on the premise of a fiat currency as taken for granted. Eliminate that, and the construct of imminent recovery from any and every economic cataclysm becomes immediately flawed. Ironically, the only reason there is no mass violence and civil uprisings right now (which would have been the case had RBS and HBOS gone under, an event which according to Bloomberg was mere hours away), is because printing presses the world over went into overdrive with wanton monopoly money (or nightcrawlers as they have been penned elsewhere in the blogosphere) creation (or destruction, depending on your perspective).

Steve Sakwa, who we may have had some harsh words for in the past, primarily during his Merrill Lynch tenure, shares some perspectives on Commercial Real Estate. His observation:

"From a financing standpoint things are far worse; from a fundamental standpoint things are certainly getting worse."

Dear Chairman Dodd and members of the Banking Committee,

We are writing to ask you to postpone the confirmation of Ben Bernanke until the Federal Reserve releases documentation that will allow the public and the Senate to have a full understanding of the commitments that the Federal Reserve has made on our behalf. Without such an understanding, it is impossible to know whether Chairman Bernanke is fit to serve another term and fulfill the Federal Reserve’s dual mandate to ensure price stability and full employment. A list of said documentation is enumerated below.

- Alan Grayson and Ron Paul

Unlike those employees at Simmons who lost their jobs, private equity pension fund managers and the GPs they invest and co-invest with are sleeping easy, counting the millions they collect in bonuses and fees as they profit by loading up the debt of companies they acquire.

"If you reduce the increasingly difficult situation facing the largest banks down to its essence, the problem is politicians picking winners and losers. If we don't have losers in our economic life, then there are no winners either. If we don't resolve troubled banks, then all of our banks will be bad, as the century-old Whithers quote above suggests. And the fact that Washington will not let large, mediocre institutions such as BAC fail means that our entire financial system is getting sicker, not recovering as the politicians ask you to believe. The different financial and operational situations facing BAC and other members of the large bank peer group illustrate the point." - Chris Whalen

"I think we’ll get more of a “square root” shaped recovery, a “V” followed by sideways to a gradually upward sloping grind. We’ve already had the “V”. Markets are overpriced. I don’t see how we can have huge economic growth with capital-constrained banks, catatonic consumers, and commercial real estate troubles up the wazoo. One of the only positives is the weak dollar, which makes everything we sell to the rest of the world cheaper. This is good for our multi-national companies, good for our exporters. So far, the dollar is on a grinding, controlled move down, which is good. But if the dollar’s fall accelerates, it would not be good. A real dollar panic would lead to the widespread dumping of dollar assets, and commodity prices would explode. Then we’ll get to $2,000 for gold and $40 for silver very quickly." - Mad Hedge Fund Trader

Inflation or deflation? Round 1 goes to ... deflation.

A round-up of arguments for looking at gold as a reasonable investment, including: 1) China; 2) declining production; 3) inflation; 4) deflation; 5) global short-term interest rates; 6) uncertainty and distrust in government; and 7) flight to safety.

Why do economists keep getting it wrong? How can we ever trust what they say again after their miserable performance before the crash? They see what they want to see. Sheep. If we've learned anything it's to ignore mainstream economists. Listen to the outliers because the mainstream never gets it right. Here's today's data brought to you by an outlier. Remember to be skeptical.

"Some will suggest that I am leaving under pressure or because of questions regarding the Merrill deal. I will simply say that this was my decision, and mine alone." - Ken Lewis

Not a bad move by the man about to be raided by the Fed, the AG, the SEC, the Tooth Fairy and who knows who else. In other news, the Chairman wins again.

A lot of hedge funds are hurting but most are doing well because they're riding the Beta Express up while charging alpha fees to their investors. Take it from me, hedge funds are no no panacea. And in many cases, they are pure con artists peddling snake oil.

"[FDIC] staff estimates that both the Fund balance and the reserve ratio as of September 30, 2009, will be negative. This reflects, in part, an increase in provisioning for anticipated failures. In contrast, cash and marketable securities available to resolve failed institutions remain positive." - FDIC, September 28