A Hard Lesson for Merrill Lynch

By Maureen Winer

In its May 19, 2008 issue, Forbes published an article by Susan Adams entitled “Subprime Baubles: A Lesson on Why Bankers Should Stay Out of the Jewelry Business”.

According to the article, a man by the name of Ralph Esmerian, a dealer in high end jewelry, purchased Fred Leighton, a retailer with stores in New York and Las Vegas catering to celebrities.  Esmerian’s purchase, made in 2006, cost a hefty $110 million.  He sought financial backing from Merrill Lynch, which lent him a total of $177 million with Esmerian’s newly purchased gems as collateral.

From that point on it was all down hill for Merrill.  The Forbes article states that Merrill “turned to New York gem merchant Benjamin Zucker, a longtime Esmerian associate, who valued a significant portion of the collateral at $89 million”.  The article goes on to point out that Zucker’s appraisal was based on the jewels’ retail value, much higher than what could be brought in at auction in a case of financial loss.

Leighton, which Esmerian took over in April 2006, was not doing so well, and by September 2007 Esmerian, according to the Forbes article, had defaulted on his loans.  Merrill then brokered a deal with Christie’s to auction off 115 “choice lots” that Esmerian claimed to be worth $75 million. Christie’s, pre-auction, “estimated their worth at between $23 million and $34 million.

At the time the Forbes article was published, Merrill was “confident” it would recoup its money, but with the auction fast approaching, Esmerian’s firm filed for bankruptcy thereby preventing Christie’s from selling off his jewels.  According to a July 6, 2008 article published in the Art+Auction online edition, Merrill Lynch, claiming Esmerian defauted “on upwards of $181 million in loans,” still had not recovered from its investment in Esmerian’s bling.  In fact, the court ruled in favor of Esmerian who was given the right to “dispose of his collection gradually, as he had intended.”  Even so, Merrill had not given up its fight and was continuing its battle through the bankruptcy court.