Posted by | January 4, 2011 09:25 | Filed under: Top Stories

By Yashwanth Manjunath

Thanks to an excellent article by ProPublica, an independent, non-profit newsroom, we now know that two years before the financial crisis hit, Merrill Lynch was engaging in blatant securities fraud. It turns out that the as early as 2006, the market for the toxic “safe,” Triple A-rated, mortgage-backed securities had dried up among insurance companies, investment banks, pension funds, and other institutional investors. Yet Merrill still needed a way to dump “sell” their newly created financial products, so they created a division within their own company to buy the securities, from the division of the company creating the securities.  But it turned out that no one, not even the bank’s own traders, wanted to buy the supposedly “safe” portions of the mortgage-backed securities Merrill was creating.

This is where the obvious fraud comes into play. In order to convince the traders within Merrill to go against their own economic interests – and the economic interests of the company – the Merrill executives creating the “safe” securities offered to share their bonuses with the traders within Merrill, in exchange for buying the toxic assets.

“It was uneconomic for the traders” — that is, buyers at Merrill — “to take these things,” says one former Merrill executive with knowledge of how it worked.

Some traders within Merrill called it a “million for a billion,” meaning a million dollars in bonus money for every billion dollars  taken on in Merrill mortgage securities. Others referred to it as “the subsidy.” One former executive called it bribery. The group was being compensated for how much it took, not whether it made money. I think the Merrill executive who called it bribery called it right.

The results for Merrill were disastrous. The group within Merrill accepted tens of billions of dollars in toxic assets created by Merrill. When the value of those billions of dollars of overvalued toxic assets plummeted after the housing bubble burst, Merrill burst with it. Merrill was then sold to Bank of America, which was later bailed out by the taxpayers. The executives running this scam walked away with millions, and many still hold prominent positions within Merrill/BOA. Meanwhile the actual owners of Merrill, pension funds and other middle-class investors, lost a fortune.

So if you are wondering why the SEC hasn’t pursued criminal charges against Merrill for this obvious fraud, there are a couple of issues holding them back. The first of course is that the banks own the government and can get away with anything they want. The second issue is that it is extremely difficult to prove securities fraud the way the laws are written and the way our criminal justice system works. Even though this situation is an obvious conflict of interest to anyone with common sense, convincing the average person of mortgage fraud and proving it in a court of law are two very different things.

In order to have the evidence to really nail these Merrill executives, the SEC will need some sort of “smoking gun.” Some sort of internal memos, or emails, or other incriminating documents that prove beyond a reasonable doubt that these Merrill executives knew what they were doing was fraud. Proof that they knew the value of the securities they were creating and selling to themselves would plummet and leave their investors, the actual owners of the company, high and dry.

This is where WikiLeaks comes into play. The next WikiLeaks document dump is going to target a major financial institution and the speculation is that it is Bank of America. If WikiLeaks really has the goods on Bank of America, they will have information on Merrill, too, since Merrill was bought by Bank of America. It is quite possible that WikiLeaks has the “smoking gun” that the SEC is looking for. Here’s hoping we can finally nail our criminal friends on Wall Street and exact some retribution for all of the damage they caused!

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