Past As Present

OK, let's continue to beat this dog into mush. Hey, I made a sled dog joke.

On October 25TH, Merrill Lynch & Co. took an $8.4 Billion credit hit, the largest in it's, or anyone else's history. Part of the reason was because of it's plunge into CDO's, spearheaded by "...Christopher Ricciardi, who from 2003 to early 2006, helped transform Merrill from bit player to powerhouse in the lucrative business of bundling loans into salable securities. But the value of many of the securities, known as collateralized debt obligations, or CDOs, has tanked this summer and fall amid rising mortgage delinquencies. Mr. Ricciardi liked to be called the grandfather of CDO's. Long before joining Merrill, he helped push Wall Street into risky new areas such as subprime mortgages, those made to home buyers with weak credit. Then he helped turn Merrill into the Wal-Mart of the CDO industry, before leaving behind a roughly $8 million annual paycheck to jump to a small firm that was a Merrill client. Along the way, he lobbied both credit-rating firms and investors, talking up the safety and juicy returns of CDOs. He and his former Merrill colleagues churned these out frenetically during the height of the boom. Now that the market has soured, leading to billions of dollars in losses for CDO investors, those involved in the business face a growing legion of angry investors." WSJ

What also contributed to the problem was the firing of four senior analysts who were tasked with overseeing the risks of these types of investments. Had the proper oversight been in place, Merrill could have avoided the mess that it's in now. But the question that begs to be asked is: who else took these risks? It's estimated that there are $300 - $400 billion (yep, that's billion with a "B") worth of CDO's out there that has yet to be accounted for.

Consider this: Merrill, in an effort to reduce it's exposure to risky mortgage-backed securities, entered into deals with hedge funds that may have been designed to to delay the day of reckoning on losses. WSJ.

As time goes on, we'll see that this may be just the tip of the iceberg.