On the heels of the sale of Bear Stearns at the fire sale price of $2 per share, Wachovia Corp. analyst Douglas Sipkin surprised many by stating that Merrill Lynch “is the riskiest” of the remaining large U.S. investment banks, as reported today by Bloomberg.com. Sipkin said that Merrill has $30.4 billion in subprime holdings and has the “worst” liquidity ratio of 52 percent.
Wachovia’s analysis was surprising because recent speculation had been that Lehman Brothers was the brokerage firm on the shakiest ground due to its mortgage and fixed income exposure. In recent days, the market price of Lehman shares had been dropping dramatically while the cost of credit default swaps on its debt obligations had soared.
These developments underscore the uncertainty affecting brokerage firms as the entire marketplace seems to be asking who holds the risk and how much risk is being held. The lack of transparency has been aided by the proliferation of complex derivatives, the existence of off-balance sheet items and the major impact of unregulated players in the financial marketplaces.