How Merrill Lynch blew itself up by eating cyanide it created23 December, 2010, 8:42. Posted by Zarathustra
Tags: Bank of America, Merrill Lynch
Traders at Merrill Lynch knew that the mortgages backed securities made by Merrill Lynch are nothing but rubbish. But no one else was buying, and they created a new unit within the firm to buy it. This story is reported here, which is a very interesting read.
The most remarkable part of the story is how the company persuaded these traders to buy these worthless papers: they paid them for buying. So the company created some worthless mortgage backed securities, and pay those traders bonuses to incentivise them to buy the papers. Supposedly the beauty of mortgage backed securities is that the risk is distributed across many of the buyers, and the bank itself should be taking no risk after selling out. They sold those worthless papers they hold in their left hands to their right hands, which was not really selling them out.