Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. Synthetic CDOs and Merrill's FallA fine piece by Gretchen Morgenson in the International Herald Tribune (as part of a series entitled "The Reckoning"):How the thundering herd faltered and fell By Gretchen Morgenson Sunday, November 9, 2008 International Herald Tribune "We've got the right people in place as well as good risk management and controls."--E. Stanley O'Neal, 2005 There were high-fives all around Merrill Lynch headquarters in New York as 2006 drew to a close. The firm's performance was breathtaking; revenue and earnings had soared, and its shares were up 40 percent for the year. And Merrill's decision to invest heavily in the mortgage industry was paying off handsomely. So handsomely, in fact, that on Dec. 30 that year, it essentially doubled down by paying $1.3 billion for First Franklin, a lender specializing in risky mortgages. The deal would provide Merrill with even more loans for one of its lucrative assembly lines, an operation that bundled and repackaged mortgages so they could be resold to other investors. It was a moment to savor for E. Stanley O'Neal, Merrill's autocratic leader, and a group of trusted lieutenants who had helped orchestrate the firm's profitable but belated mortgage push. Two indispensable members of O'Neal's clique were Osman Semerci, who, among other things, ran Merrill's bond unit, and Ahmass Fakahany, the firm's vice chairman and chief administrative officer. A native of Turkey who began his career trading stocks in Istanbul, Semerci, 41, oversaw Merrill's mortgage operation. He often played the role of tough guy, former executives say, silencing critics who warned about the risks the firm was taking. At the same time, Fakahany, 50, an Egyptian-born former Exxon executive who oversaw risk management at Merrill, kept the machinery humming along by loosening internal controls, according to the former executives. Semerci's and Fakahany's actions ultimately left their firm vulnerable to the increasingly risky business of manufacturing and selling mortgage securities, say former executives, who requested anonymity to avoid alienating colleagues at Merrill. To make matters worse, Merrill sped up its hunt for mortgage riches by embracing and trafficking in complex and lightly regulated contracts tied to mortgages and other debt. And Merrill's often inscrutable financial dance was emblematic of the outsize hazards that Wall Street courted. While questionable mortgages made to risky borrowers prompted the credit crisis, regulators and investors who continue to pick through the wreckage are finding that exotic products known as derivatives--like those that Merrill used--transformed a financial brush fire into a conflagration. Read the rest of the article Labels: Collateralized debt obligations, derivatives, financial crisis, financial crisis bailout, Merrill Lynch This Isn't Even Funny AnymoreFrom today's Financial Times:Thanks to Onet? A Polish website, for the link Wall Street 'made rod for own back' By Francesco Guerrera, Nicole Bullock and Julie MacIntosh in New York Published: October 30 2008 23:34 | Last updated: October 30 2008 23:34 Wall Street unwittingly created one of the catalysts for the collapse of Bear Stearns, Lehman Brothers and American International Group by backing new bankruptcy rules that were aimed at insulating banks from the failure of a big client, lawyers and bankers say. The 2005 changes made clear that certain derivatives and financial transactions were exempt from provisions in the bankruptcy code that freeze a failed company’s assets until a court decides how to apportion them among creditors. The new rules were intended to insulate financial companies from the collapse of a large counterparty, such as a hedge fund, by making it easier for them to unwind trades and retrieve collateral. However, experts say the new rules might have accelerated the demise of Bear, Lehman and AIG by removing legal obstacles for banks and hedge funds that wanted to close positions and demand extra collateral from the three companies. Read the rest of the article Labels: AIG, bankruptcy, Bear Stearns, derivatives, financial crisis, financial crisis bailout, Lehman Brothers, Wall Street Hard New Look at Greenspan Legacy (NYT)From today's New York Times, an interesting piece about Alan Greenspan's attitude toward derivatives.By PETER S. GOODMAN Published: October 8, 2008 “Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.” —Alan Greenspan in 2004 George Soros, the prominent financier, avoids using the financial contracts known as derivatives “because we don’t really understand how they work.” Felix G. Rohatyn, the investment banker who saved New York from financial catastrophe in the 1970s, described derivatives as potential “hydrogen bombs.” And Warren E. Buffett presciently observed five years ago that derivatives were “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.” One prominent financial figure, however, has long thought otherwise. And his views held the greatest sway in debates about the regulation and use of derivatives — exotic contracts that promised to protect investors from losses, thereby stimulating riskier practices that led to the financial crisis. For more than a decade, the former Federal Reserve Chairman Alan Greenspan has fiercely objected whenever derivatives have come under scrutiny in Congress or on Wall Street. “What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn’t be taking it to those who are willing to and are capable of doing so,” Mr. Greenspan told the Senate Banking Committee in 2003. “We think it would be a mistake” to more deeply regulate the contracts, he added. Read the rest of the article. Labels: Alan Greenspan, derivatives, financial crisis |
