One would think that the award of an $18.7 million bonus would normally be sufficient to isolate you from many of the unpleasant realities of modern life. But the way things are going for David Gu, the head of Merrill’s global-rates division, it seems the old adage about money can’t buy happiness may be once again proved true.
Shortly after the Wall Street Journal disclosed on Wednesday which Merrill executives had been awarded bumper payouts, Gu was served with a subpoena from New York’s attorney general to give a deposition on his remuneration. But as if that was not bad enough, there was talk in the financial markets that one of the traders in Gu’s division had incurred a $500 million loss, which was not immediately apparent. This will inevitably lead to further questioning of why Gu has been so lavishly paid.
The Financial Times partially broke the story on February 25, writing that, “ineffective internal controls at Merrill Lynch caused the firm to understate its 2008 losses by more than $500m,” quoting the bank’s annual report. It added: “The additional $500m in losses appear to have come from the discovery that Merrill used a flawed model for measuring the value of derivatives that were used in its hedging strategy.”
This morning, there is talk that the losses were racked up by Alexis Stenfors, a rates trader based in Merrill’s London office. Stenfors ran a big book in several currencies, including the NOK; he also apparently covered SEK as a sideline. Once source in Stockholm says Stenfors has a reputation as an aggressive trader who ran extremely large positions in forward rate agreements, overnight index swaps and swaps.
Meanwhile, well-placed sources at Merrill Lynch say Stenfors, who started there in the summer of 2005 after leaving Calyon, has not yet returned from a one-week skiing holiday he went on in mid-February. Merrill Lynch and its new owner Bank of America have little to say on the matter. “During a recent evaluation of certain positions, MLI and MLIB discovered some irregularities. We informed regulators immediately and are working closely with authorities to thoroughly investigate the matter,” says a spokesman. According to the Financial Services Authority’s website, Stenfors is still listed as being active in the market. He did not respond to attempts to contact him by phone and email.
BofA suffers Merrill FX indigestion
When I was called early last Thursday and told by a well-informed contact that Merrill Lynch had uncovered a huge trading loss in its FX and rates business, I was surprised. Throughout 2007, I regularly contacted the bank about persistent market rumours that there was a serious revaluation issue in its FX options books.
Published: 13 Mar 2009
