Toomre Capital Markets LLC

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Jeff Kronthal Returns to Merrill Lynch

In the post Merrill Lynch reorganizes trading businesses into integrated FICC division, Toomre Capital Markets LLC ("TCM") has previously written about the July 2006 changes at Merrill Lynch that resulted in the dismissal of some of its most experienced fixed-income professionals. The TCM post Merrill Lynch's Stan O'Neal: Why Is He Even Still Employed? expanded upon how the Merrill Lynch CDO positions subsequently ballooned to approximately $35 billion (from something like $3 billion in June 2006). That same post dated October 26, 2007 went on to elaborate how Merrill Lynch shareholders must yearn for the days when a true bond market professional like Jeffrey Kronthal oversaw the Merrill Lynch CDO business.

On Monday December 17th 2007, Merrill Lynch made a very pointed "fuck-you" statement to former CEO Stan O'Neal by bringing back Jeffery Kronthal as a consultant to help navigate and unwind their mortgage mess. As New York Magazine's Intelligencer blog reports, "Kronthal's new role at Merrill will be fixing the mess his old boss made; he's been hired, according to Merrill co-pres Gregory Fleming, to "advise on the firm's fixed-income business and risk management." The job is temporary — Kronthal has his own hedge fund launching in mid-2008 — but the gesture is still meaningful, as many have said that had Kronthal and the other sacked fixed-income veterans not left, the bank might not be in the shape it is today."

A true indication of the high esteem in which Jeffery Kronthal is held was demonstrated by his reception on the Merrill Lynch trading floor upon his return: a standing ovation. As this Wall Street Journal article reports, "Mr. Kronthal, 53 years old, received a standing ovation when he appeared on a Merrill trading floor yesterday, people at the firm said. After Mr. Kronthal and three other executives departed in 2006, Merrill kept ever-greater amounts of mortgage assets on its books after debt underwritings, believing their high credit rating meant they were unlikely to generate losses."

As stated in the TCM post Bond Rating Agencies Get Subpoenas, Jeffrey Kronthal headed up Salomon Brothers' CMO trading business in the early days of the structured mortgage market's development. In those years, the "big" three mortgage trading firms were First Boston, Lehman Brothers and Salomon Brothers. As head of the Lehman Brothers CMO trading desk, Lars Toomre had a chance to periodically interact with Jeffrey Kronthal and always found Jeff then (and in the years since) to be a true professional. As the subject of a similar pause in trading floor activity, Lars Toomre can testify to just how rare such a standing ovation truly is.

Jeffrey Kronthal certainly deserves a standing ovation and Merrill Lynch will do well with his insight to attempt to derive some value from their mess of sub-prime mortgages, credit collateral and CDO tranches. On December 19th 2007 with the announcement of nine plus billion in mortgage-related write-downs at Morgan Stanley, one has to wonder how much more a write-down Merrill Lynch still has to take on its approximately $20 billion of mortgage assets. Jeff no doubt will have some input, but how much more in mortgage losses does Merrill Lynch still have to report?