“The mortgage business at Merrill Lynch was an afterthought — they didn’t really have a strategy. They had found this huge profit potential, and everybody wanted a piece of it. But they were pigs about it.”

– William Dallas, founder of Ownit Mortgage Solutions, a lending business in which Merrill bought a stake a few years ago.

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There is a monster Gretchen Morgenson piece in the Sunday Times, titled,  How the Thundering Herd Faltered and Fell. Its about the rise and ignomius fall of Mother Merrill.

How did it happen? Bad mortgages.

TYPICAL of those who dealt in Wall Street’s dizzying and opaque financial arrangements, Merrill ended up getting burned, former executives say, by inadequately assessing the risks it took with newfangled financial products — an error compounded when it held on to the products far too long.

The fire that Merrill was playing with was an arcane instrument known as a synthetic collateralized debt obligation. The product was an amalgam of collateralized debt obligations (the pools of loans that it bundled for investors) and credit-default swaps (which essentially are insurance that bondholders buy to protect themselves against possible defaults).

Synthetic C.D.O.’s, in other words, are exemplars of a type of modern financial engineering known as derivatives. Essentially, derivatives are financial instruments that can be used to limit risk; their value is “derived” from underlying assets like mortgages, stocks, bonds or commodities. Stock futures, for example, are a common and relatively simple derivative.

Among the more complex derivatives, however, are the mortgage-related variety. They involve a cornucopia of exotic, jumbo-size contracts ultimately linked to real-world loans and debts. So as the housing market went sour, and borrowers defaulted on their mortgages, these contracts collapsed, too, amplifying the meltdown.

The synthetic C.D.O. grew out of a structure that an elite team of J. P. Morgan bankers invented in 1997. Their goal was to reduce the risk that Morgan would lose money when it made loans to top-tier corporate borrowers like I.B.M., General Electric and Procter & Gamble.

Regular C.D.O.’s contain hundreds or thousands of actual loans or bonds. Synthetics, on the other hand, replace those physical bonds with a computer-generated group of credit-default swaps. Synthetics could be slapped together faster, and they generated fatter fees than regular C.D.O.’s, making them especially attractive to Wall Street.

Michael A. J. Farrell is chief executive of Annaly Capital Management, a real estate investment trust that manages mortgage assets. A unit of his company has liquidated billions of dollars in collateralized debt obligations for clients, and he believes that derivatives have magnified the pain of the financial collapse.

“We have auctioned billions in credit-default swap positions in our C.D.O. liquidation business,” Mr. Farrell said, “and what we have learned is that the carnage we are witnessing now would have been much more contained, to use that overworked word, without credit-default swaps.”

The whole piece is worth a read . . .

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Source:
How the Thundering Herd Faltered and Fell
GRETCHEN MORGENSON
NYT, November 8, 2008

http://www.nytimes.com/2008/11/09/business/09magic.html

Category: Bailouts, Corporate Management, Credit, Derivatives, Real Estate

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

7 Responses to “The Thundering Herd . . . “Were Pigs””

  1. The ‘Cained Peep should detox, wake up, and keep their money at home. IOW Tear up the, one-way streets, leading Wall St. y D.C.. For starters, we can burn Charlie Merrill in effigy..

    We’re being looted, Latin-American-estilio, and funding our own destruction, in the process. We keep getting new Promises of new Processes, not just this year, or 8 years ago, or 8 before that, but, at least, 75, if not 95, or 108, probably longer. Nothing changes, no matter our Hopes. The People get the Hindmost, because, simply, Stupid never Pays..Are we Stupid? I think not, Are we Ignornant? For now, Gravely so..

  2. Bob the unemployed says:

    I guess we’re not keeping track of bank failures anymore, that “Bank failure Friday” has become passé? :)

    Regulators Seize Bank Founded by Mortgage-Backed Securities Pioneer.

  3. AGG says:

    Poor widdle puddy tat.
    Nice fat little piggly wiggly.
    Hey fat cats and pigs! Look on the bright side. You might live through this now that we see you’re some of the money you stole.
    But you never know, John Q Public is very pissied right now. You bad people better start getting real charitable real fast.

  4. AGG says:

    Bank failures,
    Don’t worry, Mauldin took VERY close notice of the recent bank failure of his buddy in Texas. That was a royal kick in the family jewels to a lot of Texans that richly deserved it.

  5. AGG says:

    Just a note to the many sane people that frequent Barry’s outpost of reasoned logic:
    Watch out when the press trys to group failures into a herd. It gives cover to the very deliberate criminal, fraudulent acts perpetrated by the people steering the rudder of all these financial institutions and brokerages that need to have their assets stripped, their kids sent to public school and their spouses imprisoned until the debt is paid. Keep the heat on with a lazer, not a scatter gun.

  6. “tries to group failures into a herd. It gives cover to the very deliberate criminal, fraudulent acts perpetrated by the people steering the rudder of all these financial institutions and brokerages…”

    yes, AGG, good point. No kidding..

    O’neil walks with, nearly, 1/4 Billion over 4 years, and the harshest rejoinder he faced, in the art, was ‘autocratic’..It’s quite the gag..

    This story, actually, tells little that couldn’t have been told in ’006, and she never mentions the multitudes of Pensions, and the like, that these ‘products’ were stuffed into, to say nothing of ‘UTC’ ‘fees’ that their ‘managers’ were paid for ‘buying’ them..

  7. bookokane says:

    I love these near once in a lifetime opportunities to nit-pick insignificant details- didn’t you mean “ignominius” fall? Tsk Tsk