When Merrill Lynch appears to need to raise capital by selling its Bloomberg stake, that concerns me. It’s a scary thought for a capital company to need to conserve it. Where did Merrill’s capital go?

A year ago, Merrill’s CFO Jeff Edwards was bragging about its increased risk strategies. “We will add more risk. And we expect to drive more trading revenue as a result of that.” How’s that working out? They bought First Franklin for $1.3 billion in September 2006 (click here for press release) to gain exposure to the lucrative area of subprime lending. How’s that working out? They used a bunch of capital participating in big Private Equity buyout deals like HCA. How’s that working out? They did a ton of CDO investing. How’s that working out? They’ve been increasing their share buyback plans during the past few years. In 2006, they bought $9.1 billion of MER stock and so far in 2007, they bought $5.3 billion. At the end of April 2007, Merrill announced plans to repurchase up to $6 billion of its shares and CFO Edwards said the plans “will enable us to continue to be active and flexible in managing our equity capital.” How’s that working out?

So if you were wondering where all the capital went to - it’s easy. It went to all the places that investors loved a year ago. Private Equity, Subprime mortgages, riskier trading, riskier loans, CDOs, off balance sheet entities, buybacks, etc. etc. And while in hindsight, that looks a bit dangerous, I’ll just remind everyone that investors cheered these moves at the times they were announced. And as for the indignant analysts that feel blindsided by the unexpectedly crappy results last week…I could post a few quotes from them saying how encouraging Merrill’s strategies for capital allocation and increased returns looked to them.

It’s easy to look at Merrill’s problems and complain or cheer Stanley O’Neal’s departure as if he was the sole responsible party, but there’s enough blame to pass around.  Investors and analysts fell in love with this stock and others like it for doing all the stuff that fueled the big rally.  Now they hate it for the same reasons.  Who’s fault is that?