Millions for Billions

Eddie Braverman's picture
Eddie Braverman - Certified Professional
Rank: The Pro | banana points 21,143

Everyone has a part of their job that sucks, no matter how satisfied they are overall. When it comes to my work here at WSO, this is the part of the job that sucks. After two and half years, the most tiresome thing I have to write about is the stupid shit Wall Street firms have done to contribute to or exacerbate the 2008 crisis. If you want to know the truth, the only reason I still write about this stuff is the sense of obligation I feel to you guys to make you aware of some of the pitfalls of the business in the vain hope that at least some of you will be able to avoid them.

In this particular case, Merrill Lynch are the knuckleheads du jour. In the interest of full disclosure, I'll tell you that I've always had a personal ax to grind with Merrill, and it was a Merrill VP whom I targeted with my dumpster diving campaign in the Playboy article. Over the years, though, Merrill was one of the better managed and successful firms, and my problem with them was primarily their refusal to hire a young Eddie Braverman.

Anyway, here's the latest.

It appears the powers that be over at Merrill in 2006 knew that the biscuit wheels had fallen off the CDO gravy train and, rather than stop creating a security there was no market for, they doubled down and created a division within the firm designed to buy the toxic shit no one else wanted. Knowing this division would lose money from day one, the division's bonus pool was based on a percentage of the dollar volume of toxic assets they moved off the books.

Dubbed "Millions for Billions", it looks like the division was paid $1 million in bonus money for every $1 billion in illiquid AAA-rated CDO tranches they bought.

The group, created in 2006, accepted tens of billions of dollars of Merrill's Triple A-rated mortgage-backed assets, with disastrous results. The value of the securities fell to pennies on the dollar and helped to sink the iconic firm. Merrill was sold to Bank of America, which was in turn bailed out by taxpayers.

What became of the bankers who created this arrangement and the traders who took the now-toxic assets? They walked away with millions. Some still hold senior positions at prominent financial firms.

If you guys think this kind of thing can't happen to you, you're wrong. In order for a scheme like this to work, the division had to be staffed with junior guys who didn't have the stroke to raise the bullshit flag and question what upper management was up to.

Again, I've grown to hate writing about stuff like this, and I long for the days when the street-level hustlers were the crooks and the guys at the top cared more about their firm's reputation than they did about buying a seventh yacht. It's true that Stan O'neal got thrown out on his ass behind the CDO mess, and he should have. But there are plenty of high-level derelicts who've done far worse and still have their jobs.

Comments (16)

Dec 29, 2010

Thanks Eddy, this stuff doesn't get a lot of mainstream coverage.

Dec 29, 2010

I don't get it...Why on earth would ML want to move the shit from one part of the company to another if they knew it was toxic? Wouldn't they try to get rid of it outside of the company?

Dec 29, 2010
everythingsucks:

I don't get it...Why on earth would ML want to move the shit from one part of the company to another if they knew it was toxic? Wouldn't they try to get rid of it outside of the company?

It's like accidentally shitting yourself and eating it too. Nobody wants your shit, but you eat it to hide the shame and try to preserve your image; and eventually, you'll get sick.

Haha, kinda gross, but that's how I see it.

Dec 29, 2010
Muzach:

It's like accidentally shitting yourself and eating it too. Nobody wants your shit, but you eat it to hide the shame and try to preserve your image; and eventually, you'll get sick.

That's poetry. Sick & disgusting, but appropos.

Attempting to be the chess player, not the chess piece @ Steadfast Finances

Dec 29, 2010

So then why did they need to pay bonuses to their own employees for buying their own shit? Couldn't they have just transferred the shit to this new department anyway?

Dec 29, 2010

I think the Mills for Bills group was buying part of ML's CDO issuance to vet the rest with the wider public. Otherwise, how would the CDO team generate revenue/bonuses that can be shared with the special group?

Absolutely awful stuff any way you slice it.

Dec 29, 2010

Basically, AIG was buying all this crap from them until 2006, when AIG figured out this stuff was a steaming pile of shit. When AIG refused to buy any more, Merrill had to find a home for this stuff and there were no takers in the market.

Ostensibly, they could create a division that purchased only investment grade MBS - which looks good on paper and to shareholders - but the guys at the top knew this stuff wasn't investment grade. In fact, they knew it was shit and that the value would decline rapidly.

I think they knew exactly what they were doing, I just don't think they had any idea how bad things would get and how quickly. Remember, they were still selling a shitload of the lower tranches and those sales offset the cost of burying the AAA stuff within the firm. But then everything blew up.

Dec 29, 2010

From everything I've read, BOA--ML is going to have some more bad news coming soon. Maybe this was it, though?

What are the chances that this is all Wikileaks has on BOA? Technically, Assange has not pointed to BOA as 'the bank' on which he has 5 GB of dirt, but BOA sure is acting like that's the case.

This is pretty damning, and may result in some legal action, but won't crush the firm by any means. To that end, what's the fall out? Any guesses?

Dec 29, 2010

Assange almost definitely has more than this. BofA has apparently bought the domain names BrianMoynihansucks.com, BrianMoynihanblows.com, etc. for all of their senior execs as a preemptive move against what they think is going to be some wicked bad publicity. What Eddie pointed out - which, by the way, is just baffling - doesn't really smear the current BofA leadership as much as it does the old Merrill people.

Dec 29, 2010
Edmundo Braverman:

It appears the powers that be over at Merrill in 2006 knew that the biscuit wheels had fallen off the CDO gravy train and, rather than stop creating a security there was no market for, they doubled down and created a division within the firm designed to buy the toxic shit no one else wanted. Knowing this division would lose money from day one, the division's bonus pool was based on a percentage of the dollar volume of toxic assets they moved off the books.

I'm not that knowledgeable about this stuff, so I have a few questions that I'm hoping will help me think through this thing: How was this set-up, and what were the incentives? Did some people within the firm want this, just so they could get crazy bonuses while losing the firm money (in other words, some people within the firm were using this division to extract money from owners, and maybe other employees, of the firm)?

Dec 29, 2010
Edmundo Braverman:

If you guys think this kind of thing can't happen to you, you're wrong. In order for a scheme like this to work, the division had to be staffed with junior guys who didn't have the stroke to raise the bullshit flag and question what upper management was up to.

Just a small anecdote on this... I interviewed for an analyst position with BofA's CDO group in late 2007.

At the super day, I was surprised that everyone that interviewed me was young....very young. I thought this was kind of odd considering all the other interviews I've been on with other firms I spoke with senior people. Furthermore, when they took me on a tour of the floor they occupied the theme continued -- no one was over 30!

Dec 29, 2010

The difficulty in finding buyers should have been a warning signal: If the market won't buy a product, maybe the bank should stop making it.

Instead, a Merrill executive, Dale Lattanzio, called a meeting, attended by among others the heads of the CDO sales group -- Margolis and De Silva -- and a trader, Ranodeb Roy. According to a person who attended the meeting, they discussed creating a special group under Roy to accept super-senior slices. (Lattanzio didn't respond to requests for comment.)

The head of the new group, Roy, had arrived in the U.S. early in the year, having spent his whole career in Asia. He had little experience either with the American capital markets or mortgages. His new unit was staffed with three junior people drawn from various places in the bank. The three didn't have the stature within the firm to refuse a purchase, and, more troubling, had little expertise in evaluating CDOs, former Merrill employees say.

Roy had reservations about purchasing the super-senior pieces. In August 2006, he sent a memo to Lattanzio warning that Merrill's CDO business was flawed. He wrote that holding super-senior positions disregarded the "systemic risk" involved.

When younger traders complained to him, Roy agreed it was unwise to retain the position. But he also told these traders that it was good for one's career to try to get along with people at Merrill, according to a former employee.

Dec 29, 2010

I think the point of buying the super-senior slices was to keep the buyers of G-rated CDOs from realizing the paper they owned was worthless. If there isn't a market for "AAA" CDOs, you shouldn't be buying the lower-rated stuff no matter how nice the yield. Had Merrill said game over and loaded up on CDS when AIG stopped buying up CDOs, they'd probably still be around today.

Dec 29, 2010
GoodBread:

Had Merrill said game over and loaded up on CDS when AIG stopped buying up CDOs, they'd probably still be around today.

Just blatant disregard for ethical propriety. The only logical solution when I read the problem is exactly what you say.

Kudos to the guy above talking about eating your own shit so no one else sees it. That's exactly what this was.

Dec 29, 2010

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Dec 29, 2010