How Merrill Lynch was destroyed within

Written by Biloxi

Charles E. Merrill  and Edmund C. Lynch, the original founders of Merrill Lynch, would roll over in their graves to see how their empire close to 100 years ago would go up in flames from greed within the company employees and executives. When mortgage-backed securities became a major concern of the investors in the real estate market, Merrill Lynch came up with a solution: Bankers at the company to offer bonuses to Merrill Lynch's own traders to invest in the securities.

From a new piece from ProPublica, Merrill Lynch created a new unit in 2006 and bought “tens of billions of dollars” of Merrill’s AAA-rated mortgage-backed assets. And these value of the securities fell to pennies on the dollar that later helped to sink Merrill Lynch. How did Merrill Lynch make a deal with the Merrill Lynch traders? Merrill Lynch offered big bucks in exchange for buying risky securities. Propublica wrote:

Within Merrill Lynch, some traders called it a “million for a billion” — meaning a million dollars in bonus money for every billion taken on in Merrill mortgage securities. Others referred to it as “the subsidy.” One former executive called it bribery. The group was being compensated for how much it took, not whether it made money….




The agreement, according to a former executive with direct knowledge of it, generally worked like this: Each time Merrill’s CDO salesmen created a deal, they shared part of the fee they generated with the special group that had been created to “buy” some of the CDO. A billion-dollar CDO generated about $7 million in fees for Merrill’s CDO sales group. The new group that bought the CDO would usually be credited with a profit between $2 million and $3 million — despite the fact that the trade often lost money.


The major question should be asked is whether the former Merrill Lynch CEO John Thain benefitted from the new unit's operation. After all, Mr. Thain did lavish himself in bonuses and expendures at the company:
 
On January 22, 2009, it was revealed that, in early 2008, Thain spent $1.22 million in corporate funds to renovate two conference rooms, a reception area, and his office, including $131,000 for area rugs, a $68,000 antique credenza, guest chairs costing $87,000, a $35,000 commode, and a $1,400 wastebasket. Thain subsequently apologized for his lapse in judgment, and reimbursed the company in full for the costs of the renovation






Thain accelerated approximately $4 billion in bonus payments to employees at Merrill just prior to the close of the deal with Bank of America. Bank of America was aware of the decision, as the payout was reportedly one of the conditions under the merger agreement. Speculation mounted that TARP funds were used for the bonus payments, but the TARP recipients are yet to disclose how TARP funds were segregated, or what they were used for.

In 2009, Mr. Thain is currently under investigation by then New York Attorney General Andrew Cuomo for criminal fraud. Merrill Lynch is certainly an example of how far some companies went in sowing these astronomical incentives into their business models and how certain corporate business models need reform.