Merrill Traders To Mortgage Assets: I Wish I Knew How To Quit You

January 23, 2009 5:10 a.m.

Yesterday we told you about how Merrill Lynch paid out billions in bonuses to staff even as its new owner, Bank of America, was begging the government for another bailout to help it digest Merrill’s massive losses on mortgage assets.

And today, buried in a New York Times story about the downfall of former Merrill CEO John Thain — whose ouster as a Bank of America exec was announced yesterday — is an intriguing nugget that suggests just how attached Merrill was to those toxic assets.

Reports the Times:

At a news conference announcing the merger, Mr. Lewis praised Mr. Thain. Mr. Lewis said Mr. Thain’s new role had not been decided, adding: “That’s a credit to John. It usually does not happen that way. And it was never about him, it was always about the deal.”

But after Merrill appeared to be safely in Bank of America’s arms, Merrill’s traders began buying risky mortgage assets, thinking that the market had bottomed out, according to two people familiar with the firm’s trading. Merrill also began to run up losses on equity derivatives and other instruments, they said.

That news conference to announce the “merger” took place September 15th.

So Merrill traders resumed buying mortgage assets after the crisis in the housing market was already abundantly clear. After the government had taken over the mortgage lenders Fannie and Freddie. After Lehman Brothers had announced it was filing for bankruptcy. After the US government had effectively taken over AIG. Above all, after Merrill itself had been bought by Bank of America, with help from $25 billion of government money.

And all those developments triggered by hundreds of billions of dollars in losses thanks to investments in bad mortgage assets.

And here’s the larger point: Merrill’s massive fourth quarter losses, which prompted B of A to seek a second government bailout, weren’t caused only by investments made before the collapse of the mortgage market, and the extent of the financial crisis, became apparent. Rather, they were in part the result of continuing to buy bad mortgage assets into the fall.

No one would trust me to invest so much as the contents of their piggy bank. But I’d like to think that, by mid-September, even I’d have known that mortgage assets might not be the best bet.

Greedy and dumb. That’s a toxic combination.

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