Harvard Business Review Guides Ultimate Boxed Set (16 Books)

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 ...