http://www.propublica.org/article/the-subsidy-how-merrill-lynch-traders-helped-blow-up-their-own-firm
Two years before the financial crisis hit, Merrill Lynch confronted a serious problem. No one, not even the bank's own traders, wanted to buy the supposedly safe portions of the mortgage-backed securities Merrill was creating
Bank executives came up with a fix that had short-term benefits and long-term consequences. They formed a new group within Merrill, which took on the bank's money-losing securities. But how to get the group to accept deals that were otherwise unprofitable? They paid them. The division creating the securities passed portions of their bonuses to the new group, according to two former Merrill executives with detailed knowledge of the arrangement
In an incident reported by the Wall Street Journal [4] ($) in April 2008, a Merrill trader looked over the contents of Octans and refused to buy the super-senior, believing that he should not be buying what no one else wanted. The trader was sidelined and eventually fired. (The same Journal article also reported that the new group had taken the majority of Merrill's super-seniors.)
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.
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