When I was 25, my childhood dream of working for Merrill Lynch was fulfilled. "Mother Merrill" had a blue chip reputation in the investment world and I was more than thrilled to be working for her. When she sold herself in desperation to Bank of America during the financial melee of Sept. 2008, I was stunned, even mortified, about the humiliating fate of my former employer. Capturing the feeling of observers, CNBC wrote, "The world, the company, the Street was in shock. How could this American institution collapse almost overnight?"
Answer: cannibals consumed Merrill.
Having experienced the tight ship that Merrill ran in Pittsburgh, I was sure the company's demise was not the fault of its stellar team of 15,000 retail financial consultants-the folks who bring Wall Street to Main Street. Something terribly unethical must have happened in another division, I thought. Investigative journalists at Propublica published details earlier this year revealing that NIR Capital Management, a penny stock firm with a position in a film titled American Cannibal, was a player in the Merrill tragedy. American cannibal is a fitting metaphor for this story.
In short, Merrill got into the go-go business of packaging bundles of mortgages to create what appeared to be relatively safe interest income for its clients. One of Merrill's big clients was a hedge fund firm named Magnetar. Here's where things get rotten: Magnetar didn't want a safe stream of income. It made millions by betting on deals that were structured to collapse (they sold short). These investments looked good on the outside but they were intentionally rotten at their core.
Someone had to put these bogus deals together. And someone had to sell them to investors. Merrill Lynch hired NIR to put together the doomed mortgage packages to fit Magnetar's liking. And Merrill sold the packages to Magnetar . . . as well as other investors who didn't realize what was going on. According to Propublica last week, when the markets smelled the stench and quit buying the entirety of the packages, Merrill insiders created another group within Merrill and paid it a subsidy to do the buying so that the former group could keep earning huge commissions. See what happened? Merrill ended up holding the bag-along with other innocent investors- on its own deadly deals. Merrill eventually tanked. When Merrill's leadership realized what had been going on, they had no choice but to sell out to Bank of America to save the company.
A few Merrill insiders and Magnetar made millions while cannibalizing Merrill and Merrill's unwitting clients. Did they do anything illegal? Maybe not. But the cannibals did trample the Golden Rule. They stomped all over it, jumped up and down on it, and lit it on fire. I'm still in shock and disgusted.