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URL:  http://boards.fool.com/also-i-thought-the-financial-insitutions-packaged-26098452.aspx

Subject:  Re: What Were They Thinking? Date:  11/14/2007  11:59 AM
Author:  Goofyhoofy Number:  22074 of 35397

Also I thought the financial insitutions packaged these subprime loans and sold them to investors. If so, why are the financial loan companies getting caught holding the bag? Did liability remain with the originator institutions?

I read a quite comprehensive backgrounder on O'Neal and "Mother Merrill" a couple days ago, but can't seem to track it down now.

The short version is that Merrill made lots of money, but others were making "lots and lots" of money, so O'Neal (then the new CEO) made a decisive culture shift. The "Mother Merrill" syndrome was gone; i.e. good performers could no longer count on decent employment through harder times, everything was about yesterday's results, blah blah blah.

Anyway, one component of Merrill's business, as you note, was assembling mortgages, packaging them, and selling them to other investors and taking a fee off the top. O'Neal (I'm sure not alone) noticed that his $20 million fee was positively dwarfed by the billion dollar package he had just placed with whichever hedge-fund du jour, offshore entity, or other packwad of money was buying it and taking all that groovy interest (this was 2002 and 2003, remember), and so he decided Merrill should become part of those money packwads, and began claiming many of those packaged mortgage piles for himself. Or rather for Merrill, using Merrill money and Merrill credit and stuffing them deep down into special purpose entities and other exotic locales where Annual Reports don't usually go.

Then O'Neal speculated. He boosted "Merrill's exposure to the volatile and ultimately toxic market for complex debt instruments" from $1 billion to $40 billion, in just 18 months, right as the sub-prime mortgage market was beginning to melt. Oops.

[That's not the story I'm trying to find, but it explains some of it.]

Anyway, like so many players in this game O'Neal found the pot of gold at the end of the rainbow, just like a lot of smart investors found tech stocks in 1999. Terrific investment a few years earlier, terrible investment at the time.

You don't lose tens of billions of dollars on mortgage packages that were in the pipeline on their way to other people. You can only lose that quantity if you're sitting on the stuffed mattress yourself, as O'Neal was - and as a lot of the other "smart" folks in our wacky financial sector were (and are.)

Anyway, it's not unlike LTCM or any of the other financial debacles in our lifetime - or before. Smart folks take a business that's making good money, see somebody else doing better and get greedy and throw caution to the wind in an ill advised gamble to get rich.

Of course in O'Neal's (and the other criminally incompetent CEO's who are losing their jobs) case he will get rich anyway, and it is the poor employees, shareholders and stakeholders who will be left holding an empty bag of dreams and recriminations.
 

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