What the Financial Statements Don’t Tell You

by John Case

In 2006, one of the largest firms on Wall Street turned in perhaps its best performance ever. Earnings set a record for the fourth year in a row; pretax profit margin was a whopping 30.1%. “After several years of restructuring and investing in our business, all of the components came together to reflect a company capable of strong disciplined performance with tremendous potential for future success,” wrote the chairman in his letter to shareholders.

The firm was Merrill Lynch. The following year it lost $8.6 billion—“the worst performance in the history of Merrill Lynch,” as the (new) chairman acknowledged. In 2008 Bank of America agreed to buy Merrill in a distress sale, and in 2009 ...

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