How a Few Bankers Blew Up Merrill Lynch
The Largest Welfare Check Ever Written
The Top 5% hold 95% of all US bonds. The interest payments to those elite are the largest welfare check ever written. Yet such largesse is not enough. Brokers still pay themselves bonuses on money-losing deals. We trim, blend, and append two 2010 articles from (1) CounterPunch, Dec 10, on bonds by Thomas Volscho (CUNY / College of Staten Island) and (2) ProPublica, Dec 22, on Merrill Lynch by Jake Bernstein and Jesse Eisinger.
by T. Volscho and by J. Bernstein & J. EisingerWho rules America? C. Wright Mills argued in his 1956 book The Power Elite that America was ruled by a triangle of the federal government, large corporations, and the military industrial complex (with many people moving between these sectors). Robert McNamara went from CEO of Ford Motor Company to Secretary of Defense under the Kennedy-Johnson administrations (more recently, Dick Cheney).
Since the late 1960s, G. William Domhoff has updated the details of the power elite. Since the Reagan administration, there is significant movement between Wall Street and the Federal Reserve Bank and Treasury Department. Examples include Henry Paulson, Robert Rubin, Larry Summers, etc.
In Wall Street Capitalism: A Theory of the Bondholding Class, E. Ray Canterbery (2000) explains the rich used money from tax cuts to buy the bonds, notes, and bills that the Treasury Department issued in order to finance Reagan's deficits. Now working and middle-class taxpayers pay a “bondholder's tax” to firms like Goldman Sachs and JP Morgan Chase (as well as Japan and China).
Treasury, State, and Municipal bonds are highly concentrated among the rich. In 2007, the Top 5% (ranked by net worth) held about 93.6% of all bonds (this does not include the savings bonds that the working and middle classes are familiar with). Likewise, the Top 5% owned 82.4% of all stocks. The bondholding class oscillates between bonds and stocks as market conditions dictate.
The Wall Street Ruling Class manipulates the supply of bonds, bills, and notes of differing maturities through its “Treasury Borrowing Advisory Committee” to maximize the economic gains of the bondholding class. The current Chairman and Vice Chairman are from JP Morgan Chase and Goldman Sachs, respectively.
Treasury securities come in maturities of 1 month, 3 months, 3 years, 7 years, 10 years, and 30 years. But rarely does the bondholding class hold their securities to maturity. Instead, they are circulated through secondary markets. In October (2010), the average daily trading volume of Treasury bonds was $558 billion.
Net interest payments on Treasury securities -- held largely by the Wall Street Ruling Class -- are the largest welfare check ever written.
JJS: The wealthy invest in both the safe debt of the US and the risky debt of overblown mortgages. Even when those pieces of paper lose value, the Wall Street brokers still make money -- lots of it.
How a Handful of Merrill Lynch Bankers Helped Blow Up Their Own Firm
During the real estate bubble of the early 2000s, Merrill Lynch paid upfront for mortgages, but this outlay was quickly repaid as the bank resold “the securities” to investors. The bankers doing these deals had a saying: We're in the moving business, not the storage business. Then in 2006 (when land prices peaked), Merrill Lynch could not sell their supposedly safe mortgage-backed securities.
So company executives formed a new group within Merrill and paid them portions of their bonuses to buy the bank's money-losing securities. This group played a crucial role in keeping the money machine moving long after it should have ground to a halt.
Sharing the bonus money for a deal or trade is common on Wall Street, arrangements known as "soft P&L," for "profit and loss." But it is not typical, or desirable, to pay a group to do something against their financial interests or those of the bank. At Merrill, the new group that bought the securities would be credited with a profit -- despite the fact that the trade often lost money.
Group members made millions in bonuses. Some traders called it a "million for a billion" -- meaning a million dollars in bonus money for every billion taken on in Merrill mortgage securities. The group was being compensated for how much it took, not whether it made money.
The group accepted tens of billions of dollars of Merrill's Triple A-rated mortgage-backed assets. The value of the securities fell to pennies on the dollar and helped to sink the iconic firm.
Despite its precarious state, Merrill paid bonuses to its top executives. Then Merrill was sold to Bank of America. The SEC turned its focus on Merrill and BofA's bonuses and sued, alleging failures to properly disclose the payments.
While taxpayers bailed out BofA, what became of the bankers who created this arrangement and the traders who took the now-toxic assets? They walked away with millions. Some still hold senior positions at prominent financial firms.
JJS: While these brokers were dishonest and cheated and should be convicted of embezzlement and rot in jail, it’s not easy to resist the temptation of easy money. As a society, we send almost all the value of land into mortgages. Those mortgages represent too many unearned trillions floating around for the unscrupulous to snag.
We say “unearned” yet the payments for land and resources are earned. Not by owners, since owners did not create land and resources. But by all of us, since we all create the amenities of location -- things like population density, infrastructure, low crime rates, livable wages; and location, as the joke has it, are the three most important things in real estate.
How do we keep the worth of Earth from being looted? By implementing geonomics. We must recover those earthly values -- by taxing or fees or dues or leases -- and share those revenues fairly. Doing so, we’d not only prosper but we’d also reduce finance to a small -- and honest -- business.
Editor Jeffery J. Smith runs the Forum on Geonomics.
Let's add Land Speculators to the list, too
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Investigating Friedmanism at the Fed
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