David Prosser's Outlook: Merrill Lynch piles on the credit misery

A patron saint oflost causes?; A watchdog with no bark or bite
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The Independent Online

First the good news. Market gossip doing the rounds in recent days that Merrill Lynch would announce credit crunch-related write-offs of $12bn (£5.8bn) in its third-quarter results turned out to be unfounded. Yesterday, Merrill's said its write-down for sub-prime mortgage and CDO investments would be just $7.9bn. Phew.

The scariest thing about that number is not its scale, though the losses eclipse the write-offs announced by Merrill's Wall Street rivals – and it is the only large US investment bank to have been pushed into the red by the credit crisis. What's much more worrying is the way in which the figure has grown so quickly – just three weeks ago Merrill's was forecasting that the write-downs would come in at around £5bn.

The pace at which Merrill's problems have escalated tells us two things about the credit crisis. First, that rumours of the crunch's demise have been sorely exaggerated. And second, that it remains difficult to work out the true scale of sub-prime losses at any given moment in time.

Now that memories of the queues around the block at Northern Rock are fading, it is tempting in this country to assume that the worst of the crisis is behind us. Central banks have stepped in to provide liquidity to the market. Interbank rates have fallen back from the records seen last month. And, crucially, no other bank has succumbed to disaster Rock-style.

Yet day by day, the bad news continues to seep out. This week alone, two structured investment vehicles have called in the administrators and the jury remains out on the merits of the $75bn super fund Wall Street is constructing to buy up asset-backed securities that continue to collapse in value.

On Monday, Countrywide Financial, the American mortgage lender at the eye of the sub-prime storm, said it would help customers at risk of defaulting on their home loans, in an attempt to head off total collapse in the housing market. This effort, however, may come too late to prevent a global economic slowdown, lead by a US recession. Increasing numbers of economists and bankers, as well as leading American companies, are now predicting this turn of events.

Back at Merrill Lynch, there could soon be another victim of the credit crunch. Three weeks ago, chief executive Stan O'Neal fired the senior executives deemed responsible for the losses his shareholders are now incurring. But his own position looks increasingly under threat.

As captain of the ship, Mr O'Neal must bear the ultimate responsibility for the predicament in which Merrill's now finds itself. This, after all, is a bank that as recently as July was still insisting that its exposure to sub-prime was "limited, contained and appropriate". Not only was the bank wrong then, it now turns out Mr O'Neal had not even understood the true scale of Merrill's exposure three weeks ago.

A patron saint oflost causes?

Talk about out of the frying pan. After six years in Downing Street, including a long stint as Tony Blair's official spokesman, Tom Kelly might have been forgiven for accepting a lucrative private sector job offering a bit of peace and quiet. His appointment as director of corporate and public affairs at BAA no doubt pays well, but Mr Kelly shouldn't bank on a quiet life.

Indeed, the list of problems facing BAA grows longer by the day. It is dealing with three separate inquiries into its business – from the Competition Commission, the Civil Aviation Authority and, as of last week, the Transport Select Committee. Then there's the public wrath it faces over the living hell that Heathrow has become (plus the worry its £3.5bn investment programme for the airport may not be affordable following a miserly CAA settlement on passenger charges). And don't even mention the words "debt refinancing" unless you enjoy watching hardened corporate financiers weep.

While handling all this, BAA chief executive Stephen Nelson also has some serious recruiting to do, having lost a slew of senior staff in recent months, including his chief operating officer and – to red faces all round – the chief executive of Heathrow itself.

Appointing a spin doctor of Mr Kelly's pedigree has clearly been a priority. The way in which BAA handled its recent legal efforts to restrain protestors from climate change groups must be a contender for PR disaster of the year. Not content with preventing radical eco-protestors from disrupting its operations, BAA also seemed intent on banning members of that militant action group the National Trust from setting foot in its airports.

Not that Mr Kelly is gaffe-free. Four years ago, in the aftermath of the suicide of Dr David Kelly, the scientist caught up in the row over the alleged "sexing up" of the Government's dossier on Iraq's weapons of mass destruction, he was forced to make a public apology to Dr Kelly's family. Mr Kelly (no relation) was outed as having briefed a journalist that Dr Kelly was "something of a Walter Mitty character". Public outrage followed.

Still, the affair proved one thing: Mr Kelly is a survivor. Despite calls for his head, he clung on to his job at Downing Street, only leaving this year when Mr Blair stood down. BAA needs such nerve and, no doubt, Mr Kelly's ability to act as a lightening rod for criticism of his superiors will also come in handy.

A watchdog with no bark or bite

What is the point of the Advertising Standards Authority? I pose this rhetorical question because for the third time in a week yesterday, the watchdog announced it had told a large, blue-chip company to withdraw an advertisement following complaints that it was misleading.

The latest miscreant is Sky, hauled over the coals for claiming rivals treated new customers better than existing clients when it has behaved the same way. Like Reckitt Benckiser, which has just been rapped for some dubious claims about the relative cleanliness of chopping boards and toilet seats in an ad for Dettol, Sky was banned from repeating the ad. Ryanair received the same punishment last week following claims it made about online ticket agents.

The ASA is doing its job then. Adverts appear, people complain about them and, following careful investigation, the regulator takes action, assuming, that is, there has been a breach of the rules. Having been publicly embarrassed by a negative ruling, the advertiser presumably takes more care next time around.

Except it doesn't. In Sky's case, this is the fourth time this year that the ASA has upheld complaints against it. Ryanair is on its third warning. The prospect of an adverse ruling from the ASA appears not to have unduly worried either company.

Nor should it. There are no financial penalties for breaking the ASA's regulations and the public embarrassment factor is, truth be told, pretty negligible. Only the most damning rulings are reported and in the vast majority of cases, these write-ups are likely to be seen by far fewer people than the numbers who viewed the original advert.

Let's put it another way. Subject to the laws of libel and slander, advertisers can say what they like about their rivals, safe in the knowledge that while the ASA may, in time, force them to withdraw the commercial, the damage will have been done.

Even worse, the evidence of Sky and Ryanair is that advertisers can break the rules time and again. The ASA treats each case separately – and though it can make referrals to the broadcasting regulator, Ofcom, when offenders repeatedly step out of line, in practice this seems to be a theoretical sanction.

Self-regulating systems such as the ASA often suffer from this sort of difficulty, relying, as they do, on the goodwill of the industries they police. They also tend to be badly funded. The ASA, for example, operates on a budget of just over £7m a year, a figure dwarfed by the ad spending of just a single large company.

d.prosser@independent.co.uk

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