BL: Merrill Shifts Mallach to Lead Firm's Purge of Troubled Assets
By Bradley Keoun
May 22 (Bloomberg) -- Merrill Lynch & Co. is shifting Doug Mallach, its top U.S. fixed-income sales executive, to a new role overseeing the firm's push to get rid of assets spoiled by the subprime mortgage crisis.
Mallach, 39, will lead a team Merrill created to sell assets including collateralized debt obligations, the mortgage- related securities that caused most of the New York-based firm's $37 billion of writedowns over the past nine months, a person briefed on the matter said.
The team, called FICC Asset Management and carved out of the fixed-income sales force that Mallach previously oversaw, reflects Chief Executive Officer John Thain's focus on eradicating money-losing mortgage-related bonds accumulated under his ousted predecessor, Stan O'Neal. The mortgage market has been frozen since last year, thwarting a pledge Thain made in January to liquidate the assets.
Mallach's appointment is ``part of our ongoing effort to optimize our asset and risk profile,'' David Sobotka, who oversees Merrill's Fixed Income, Currencies and Commodities division, wrote in a May 21 memo that was confirmed by spokeswoman Danielle Robinson.
Merrill, the third-largest U.S. securities firm, had about $26 billion of senior collateralized debt obligations -- securities formed by pooling mortgage bonds and other forms of debt -- as of March 28. Investors are wary of assets linked to mortgages because of the U.S. housing market's decline, and Merrill has had to write down its CDOs to about 32 percent of their original value, based on an April 17 estimate by Oppenheimer & Co. analyst Meredith Whitney.
`Good Value'
In January, Thain said the firm had discounted its CDOs so much that they ``are either saleable or represent good value.'' Last month, after writing the CDOs down by an additional $1.5 billion, he acknowledged the securities had scarcely traded because hedge funds and other potential buyers were ``probably waiting to see'' if prices would fall further.
Merrill's push recalls Citigroup Inc.'s formation last December of the Sub-Prime Portfolio Group to manage most of its $43 billion of subprime mortgage assets.
A 17-year Merrill veteran, Mallach will work initially with Jeff Kronthal, a former Merrill executive who was recruited by President Greg Fleming last December to be a consultant on the disposition of assets. Kronthal will remain until the end of July, when he will return to KLS Diversified Asset Management LP, the hedge fund he's starting with two partners, Harry Lengsfield and John Steinhardt.
Fewer Reports
Mallach's new team will consist of a handful of assistants, contrasting with his prior role managing several hundred fixed- income sales people in the U.S., the person familiar with the matter said. He will report to Sobotka.
The sales managers who had been his deputies will now report directly to Sobotka.
Mallach was one of only a handful of survivors from the management team installed in August 2006 by Osman Semerci, then head of FICC. Semerci and Dale Lattanzio, who oversaw trading in the Americas, were both fired in October 2007. Dimitrios Psyllidis, Theo Constantinidis and Michael Blum have since departed. Sobotka, who previously oversaw Merrill's commodities business in Houston, was promoted into Semerci's post.
Thain last month said that overhauling management of Merrill's trading businesses was one of his top priorities in the U.S. On April 28, he announced the hiring of Thomas Montag, a former Goldman Sachs Group Inc. executive, to join Merrill as head of sales and trading starting Aug. 4.
Merrill owns a passive 20 percent stake in Bloomberg LP, the parent of Bloomberg News.
To contact the reporter on this story: Bradley Keoun in New York at bkeoun@bloomberg.net.
Last Updated: May 22, 2008 10:48 EDT
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