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Merrill Traders To Mortgage Assets: I Wish I Knew How To Quit You
Yesterday we told you about how Merrill Lynch paid out billions in bonuses to staff even as its new owner, Bank of America, was begging the government for another bailout to help it digest Merrill's massive losses on mortgage assets.
And today, buried in a New York Times story about the downfall of former Merrill CEO John Thain -- whose ouster as a Bank of America exec was announced yesterday -- is an intriguing nugget that suggests just how attached Merrill was to those toxic assets.
Reports the Times:
At a news conference announcing the merger, Mr. Lewis praised Mr. Thain. Mr. Lewis said Mr. Thain's new role had not been decided, adding: "That's a credit to John. It usually does not happen that way. And it was never about him, it was always about the deal."But after Merrill appeared to be safely in Bank of America's arms, Merrill's traders began buying risky mortgage assets, thinking that the market had bottomed out, according to two people familiar with the firm's trading. Merrill also began to run up losses on equity derivatives and other instruments, they said.
That news conference to announce the "merger" took place September 15th.
So Merrill traders resumed buying mortgage assets after the crisis in the housing market was already abundantly clear. After the government had taken over the mortgage lenders Fannie and Freddie. After Lehman Brothers had announced it was filing for bankruptcy. After the US government had effectively taken over AIG. Above all, after Merrill itself had been bought by Bank of America, with help from $25 billion of government money.
And all those developments triggered by hundreds of billions of dollars in losses thanks to investments in bad mortgage assets.
And here's the larger point: Merrill's massive fourth quarter losses, which prompted B of A to seek a second government bailout, weren't caused only by investments made before the collapse of the mortgage market, and the extent of the financial crisis, became apparent. Rather, they were in part the result of continuing to buy bad mortgage assets into the fall.
No one would trust me to invest so much as the contents of their piggy bank. But I'd like to think that, by mid-September, even I'd have known that mortgage assets might not be the best bet.
Greedy and dumb. That's a toxic combination.
Josh
Zachary
Well... the "bailout meme" surfaced very quickly after Sept. 15, and, as pointed out, BofA promptly was the recipient of $25 billion. I think continuing to buy more toxic debt and crap-shooting the bubble derived more from the "we're too big to fail" mentality than anything else. And, after all, taxpayers are covering their losses: Last week BofA got $20 billion more bailout aid and guarantees for bad assets amounting to $118 billion. That's on top of that earlier $25 billion chunk. So... greedy, yes. Very. Soullessly.
But dumb? ...Not so much.
January 23, 2009 10:47 AM | Reply | Permalink
MBNA, a bank with ethics problems, bought BofA, layed off 1000's, changed it's name to BofA and continued it's unethical and imprudent financial dealing, buying deeply troubled and very unethical Countywide. Not to worry, our dumb ass Congress to the rescue, putting the financial meltdown in overdrive by throwing gasoline on the fire. God save us, because our Congress surely won't.
January 23, 2009 11:07 AM | Reply | Permalink
Something must be done before people's frustration with this boils over. Seriously, how long before we see angry mobs of tax payers storm the offices of these wretched people to tar and feather them? Or worse?
It would be nice if Thain could experience a couple years in jail, but I doubt any laws have been violated. But we should accept nothing less than the return of the bonus money and the permanent expulsion from the profession of those that would steal from taxpayers.
January 23, 2009 11:33 AM | Reply | Permalink
Hell, 2 years ago 30 percent of mortgagees couldn't even make their first payment. Since that wasn't classified info and buying (and of course selling) of risky mortgage assets continued unabated, there was profit to be made somewhere and by somebody.
January 23, 2009 11:37 AM | Reply | Permalink
Boy, it sure is a great for America that this guy, and all his buddies, are insulated from the slightest risk of pesky shareholder lawsuits for breach of their fiduciary duties. First they catastrophically screw up, then they pay themselves four billion in bonuses for catastrophically screwing up, then they catastrophically screw up some more. Then he sells the wreckage to another gigascrew-up company and drops 1.2 million bucks on decorating his new office.
I'm a pretty moderate guy. Really. But it's really becoming apparent that over the last two decades, our economy has been run by sociopaths and I really get the feeling that the only thing that's going to shock some damn sense, some degree of proportionality and shame, some understanding of the connection between acts and consequences, back into them are firing squads and guillotines.
January 23, 2009 11:46 AM | Reply | Permalink
I guarantee you that there is more to this story.
Try to play this out in your mind. There was zero doubt about the direction of these asset prices post Lehman.
In other words, there were no, as Zach's analysis seems to imply, misguided traders. These trades were not mistakes in the sense of a misread of the market.
What were they then? At whose direction?
The point I'm trying to make is that we are as yet not even close to being accurately informed on the going forward strategy of the financial institutions that are currently sucking up vast amounts of the grandchildrens tax dollars. As a result there is nothing to compare actual results to for ongoing comment by the players and analysts.
Economist bloggers like Roubini, Krugman, DeLong, Thoma, et. al., are not in the business of investigative journalism and their content does not explore the details of these transactions from the perspective of the tax payer/homeowner/business owner.
I should say that the grandchildrens tax dollars is actually not a good way of describing the price we will be paying for these bailout activities. All of this money could soon (2 - 4 years) eventually result in the kind of inflation that people in Zimbabwe are all too familiar with.
Think I'm exaggerating this last point? Go ahead and google the inflationary impact of the bailout and read any analysis that you like.
It is indescribably crucial that journalists (especially Zach Roth) keep their teeth sunk into this particular story and others like it like a pitbull. It will almost certainly lead to a larger (and more disturbing) story than just the three ring circus that is ML, BofA, and Shitty Group.
We must continue to ask the question of these revelations: "Now why would someone do this?", striking out and becoming alert to the answers that simply make no sense.
January 23, 2009 12:00 PM | Reply | Permalink
EG
I am not an economist. But why were they doing this?You Ask.
Could it be that Govt. Bailout money was the real goal? Put as much into toxic assets, because the govt. is paying good money for toxic assets?
You were already in the good-money-after-bad mode. Once you had lost your first huge blobs of money, what honest trading and buying and selling could you do to recover? Not much.
But, if the Govt. is paying top-dollar for worthless crap, why not buy up a whole butt-load of toxic crap?
January 23, 2009 12:11 PM | Reply | Permalink
OK... I'm game. Let me suggest a scenario: I'm a fatcat investment banker with a mogul-emperor's office (parchment trash cans and designer drapes... whole shot) and I've got a neighbor in Rye - let's call him Joe - and Joe is holding a lot of skunk loans and his losses are mounting. (I probably sold him a bundle or two myself - haw!) My firm is about to be scooped up by a big bank that's in line for some bailout money, so I buy his toxic debt. This is all about helping out our fellow man. Or... say "Joe" is really stock I have in an investment firm that needs some rescuing, so, indirectly, I use the bailout money to bail out... my own ass.
Like that...
And while we're looking at this - what the hell is a parchment trash can? What it's made of, or what it disposes of? What?
January 23, 2009 6:03 PM | Reply | Permalink
That is one theory, that employees knowingly bought assets they expected to get worse.
Another is that they stupidly thought that government intervention meant the bottom was very near.
It would be interesting to see just what they bought and sold, in detail.
I'm still trying to figure out how CDS instruments fit into the scene today. They got a lot of air time last fall, now almost nothing. The silence is as scary as it is deafening.
January 23, 2009 7:54 PM | Reply | Permalink
First, let's remember that some of these people really had bought into their own hype. So they might have imagined that the bailout would free everything up and increase the value of their purchases, at least long enough to unload them. (Ironically enough, if the banks themselves had done anything with the bailout money other than stuff it under one anothers' mattresses, that might have been true.)
Second, when your losses are being guaranteed, the cost-benefit calculation for a trade changes markedly. Oh, you thought there wouldn't be moral hazard?
January 23, 2009 12:37 PM | Reply | Permalink
All this should drive a stake through the heart of the notion that private business can always do it better than the government, but it won't. Silly bastards still have way to much control in this country.
January 23, 2009 1:57 PM | Reply | Permalink
Ask anyone who ever worked on Wall Street : the greed in some of the people one meets there is shocking.
Imagine a guy whose brain is hooked up to nothing but greed. Will he cheat you ? Sure. Will he take from the government ? You bet. Will he hide assets, lie, connive and plot to steal more ? Yes.
Like speed freaks, but money as speed.
To see these guys trading, jumping around, shrieking, eyes bugging out, saliva flying ... amazing.
To give the keys to the US Treasury to Wall Street, without supervision, is about the stupidest move ever. Mind-boggling.
Republics do not have to last a long time ... read in Montesquieu what happens when "the patrimony of all become the patrimony of the few" ...
January 23, 2009 2:20 PM | Reply | Permalink
Sounds like Type-T Personality. Thrill-seekers.
January 23, 2009 8:27 PM | Reply | Permalink
Agree.
Their brains may be lacking certain neurotransmitters ... they need to get a jolt from grabbing money.
It is amazing to see - fascinating and revolting.
January 27, 2009 11:27 PM | Reply | Permalink