Merrill Severs Ties With Former Executive Kim’s Fund (Update4)
By Bradley Keoun
Oct. 4 (Bloomberg) — Merrill Lynch & Co., the world’s largest brokerage, won’t invest in the hedge fund started by former co-head of trading and investment banking Dow Kim, three people with knowledge of the matter said.
The decision follows trading losses at Merrill that led to yesterday’s ouster of Kim’s protégé, Osman Semerci, as head of the fixed-income division.
When Kim, 44, announced in May that he would leave to start Diamond Lake Investment Group, Chief Executive Officer Stanley O’Neal said New York-based Merrill would “benefit from his investment expertise by forming an affiliation with Kim’s new firm.” The company severed ties instead because Kim had been responsible for the mortgage and fixed-income businesses that are now causing losses, said the people, who didn’t want to be identified commenting on a decision that wasn’t public.
Merrill said last month that “credit-market conditions have continued to remain challenging” and that third-quarter profit may be hurt by asset writedowns. Goldman Sachs Group Inc. analyst William Tanona estimates Merrill may have to write down as much as $4 billion of corporate loans, mortgages, asset-backed securities and other assets when it reports earnings for the quarter that ended Sept. 28.
Shawn Pattison, an Abernathy MacGregor Group public- relations executive who’s a spokesman for Diamond Lake, declined to comment on the hedge fund’s investors. Merrill spokeswoman Jessica Oppenheim wouldn’t elaborate on the firm’s financial relationship with Kim’s fund. Oppenheim said his affiliation with Merrill ended this week.
Merrill fell 85 cents, or 1.1 percent, to $75.15 in 10:38 a.m. New York Stock Exchange composite trading, leaving the stock down 19 percent this year. Goldman Sachs Group Inc., the biggest U.S. investment bank by market value, has gained 14 percent in 2007 and Morgan Stanley, ranked second, is little changed. Merrill ranks third by market value and first in brokers with 16,200 financial advisers and $1.7 trillion of client assets.
Kim, who was born in Korea and who has a master’s degree in business administration from the University of Pennsylvania’s Wharton School, had planned to remain at Merrill as an adviser to senior management until the end of 2007.
“Dow has not been involved in the day-to-day activities of Merrill Lynch since May,” Pattison said. “He has been spending 100 percent of his time on Diamond Lake.” The hedge fund moved into a new headquarters in New York this week, Pattison said.
Kim joined Merrill in Tokyo in 1994 from Chemical Banking Corp. He helped run Merrill’s foreign-exchange and derivatives desks, and was promoted in 2001 to head the firm’s debt business.
Merrill owns stakes in other private investment firms, including DiMaio Ahmad Capital LLC, a hedge fund founded by former Credit Suisse Group bond executive Jack DiMaio.
Kim, who was co-head of global markets and investment- banking since 2003, put Semerci in charge of the fixed-income division after the departures of Jeff Kronthal, Harry Lengsfield and Doug DeMartin. Semerci, who was based in London, and one of his top two deputies, Dale Lattanzio, 43, were fired after losses in the credit markets.
David Sobotka, 50, head of the firm’s commodities unit, will take Semerci’s place, Merrill said in a memo to employees yesterday. The fixed-income division accounted for 22 percent of the firm’s $5.42 billion of revenue in the first half of 2007.