Merrill Lynch disarray

That is shocking. How could Merrill have got the scale of its exposure to losses so wrong? Was it not conservative enough the first time round, factoring in instead some sort of price recovery in these illiquid instruments? Or was it simply unaware of the true depth of its problem? Neither explanation will give any comfort to investors. Nor should either be enough to remove the spotlight that must now be shining on Stan O'Neal's position as chief executive.

More broadly, investors might well reassess their confidence in the mark-to-market losses taken so far by other banks. One thing Merrill's mess underlines is how subjective the marks appear to be for the more complex and illiquid instruments. No wonder the whole sector sold off alongside Merrill, on renewed fear that there might be more monsters lurking on investment banks' balance sheets.

Let's assume Merrill really has now taken a conservative view of its mortgage portfolio. It made clear on its conference call that it does not intend to ratchet back its risk appetite in other areas of the business that are performing well. It is sensible not to throw the baby out with the bath water. The problem for investors after Wednesday's fiasco is that a huge question mark now hangs over Merrill's ability to manage risk - the foundation of any investment bank.