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Fakahany Says Merrill Enhanced Risk Management Before Crisis

Merrill Lynch & Co. enhanced risk controls in the years before mortgage losses eroded its capital and led to a forced sale to Bank of America Corp. in 2008, former co-President Ahmass Fakahany said.

“The risk dynamic in the financial-services industry was getting broader and more complicated, especially on the regulatory front, and so we had to buttress our capabilities,” Fakahany, 52, said in an interview aired today on Bloomberg Television. “We expanded the number of risk managers on the trading floor.”

Fakahany was responding to a book excerpt in the November issue of Vanity Fair magazine saying he reduced the role of risk managers. The excerpt is from “All the Devils Are Here,” by Bethany McLean and Joe Nocera, scheduled to be published in November, according to Vanity Fair. Merrill’s risk department went into “decline” after Fakahany was given responsibility for it, and he knew “next to nothing” about risk management, according to the excerpt, which doesn’t name its sources.

Fakahany said he wasn’t contacted by the book’s authors before it went to press and declined to comment to a Vanity Fair staffer prior to publication of the excerpt because he said he didn’t know what it would say. When contacted by Bloomberg News, Nocera said he Googled Fakahany, couldn’t find him, and never called him.

“I spent 20 years with the firm in control groups with risk committees, with regulators, with auditors,” Fakahany said in the Bloomberg interview. “It would be totally ridiculous to try to dilute the risk program as the company was becoming more complicated, given that was my background and my skill set.”

‘Best Practice’

The excerpt says one risk manager quit after Fakahany promoted the head of credit risk to oversee managers of other areas, including market risk. The manager viewed the changes as a “degradation of the risk function,” according to the excerpt.

Appointing a single manager to oversee all categories of risk and integrate them more closely was becoming “best practice” at the time, as it is now, and was encouraged by regulators, Fakahany said.

“It’s complicated,” he said. “It’s not as simple as a small anecdote.”

Fakahany joined New York-based Merrill in 1987. He served as chief financial officer from 2002 to 2005, when he was named chief administrative officer, with responsibility for risk management. Fakahany was promoted to co-president by Merrill Chief Executive Officer Stan O’Neal in May 2007. O’Neal was ousted in October 2007, and the company posted a $9.8 billion loss in the fourth quarter of 2007. Merrill announced Fakahany’s retirement in January 2008.

In the Bloomberg interview, Fakahany declined to give his views on what went wrong at Merrill. “I don’t know anyone who wouldn’t have done certain things differently in retrospect,” he said.

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