There are “no free lunches in the capital markets,” said Henry T. C. Hu, a corporate and securities law professor at the University of Texas Law School in Austin. With such large profits coming from proprietary trading in complicated products, he said, “If you were on the board, you want to make especially sure that the risk-control mechanisms are really effective. It turns out, they weren’t.” Analysts say that directors should have asked about the exposures and, more important, what might happen to those exposures under various financial scenarios, including a collapse of the mortgage market. The directors were told about the firm’s subprime exposure in April and collateralized debt obligations in July, according to a person briefed on the presentations who requested anonymity because the person was not authorized to speak publicly. In addition, the securities are hard to value, leaving the board in a position where it has to trust management’s best decision. In fact, Merrill said in late September that it would take a $5.5 billion write-down and 50 cent-a-share loss, only to have to report weeks later an $8.4 billion write-down and a $2.3 billion loss. Analysts expect further write-downs from Merrill. This argument, however, doesn’t fly with some experts. Mr. Hu said that in the current highly regulated environment, directors have to be both sophisticated and engaged. “In today’s world, they cannot rely solely on information that happens to be provided to them by management,” Mr. Hu said. “The board needs to be more proactive in obtaining information.”
The New York Times
Where Did the Buck Stop at Merrill?