Cuomo Asserts That Traders Looted Merrill

I must confess I skipped past the headlines on New York Attorney General Andrew Cuomo latest salvo at Bank of America and Merrill over the Merrill bonus payments in December.

Recall that those bonuses were paid earlier than usual so as to occur before the closing of the Merrill sale. Merrill contends it informed the Charlotte bank (and payments of that sort would have to be approved, otherwise it would be a violation of the merger agreement and could have jeopardized the deal).

The latest wrinkle, which generated a flurry of press reports, was that Cuomo had taken a new tack, charging that Merrill had misled Congress as to when the payments would be made. But for my money, the juiciest bit came at the end in the New York Times story:

Mr. Cuomo claimed that Merrill traders had mismarked their books as of early December in an effort to get higher bonuses.

“It appears that some of these losses may have been booked by Merrill employees who marked down their portfolios only after their 2008 bonuses were set,” the attorney general wrote in the filing. “Despite the gargantuan unexpected losses, Merrill did not reconsider its bonus awards” and Bank of America did not request or demand that Merrill reduce its bonus pool, he wrote.

This is a particularly strong and damaging claim. I’ve read repeatedly of people who worked with traders saying that they would engage in strategies (not clearly described) that would lead them to show high profits though year end that they would wind up giving back (and often more) early in the next year. The idea was that they’d make so much on their trumped up performance that it didn’t matter if they were fired next year. But a lot of types of behavior could produce this result, so it’s hard to know what sort of trader chicanery was afoot. And without names, or descriptions of the nefarious deeds, its too vague to treat as substantiated.

But here, if Cuomo is correct, we have what amounts to fraud, and brazen to boot. And the exaggerated profits would also seem to be a books and records violation for senior management.

This could get very interesting. The investigations are finally getting to where the rubber hits the road.

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  1. Hu Flung Pu

    Given the illiquidity in many trading positions (and resulting “judgment calls” with respect to valuations), it wouldn’t surprise me one bit to find that traders had purposely misled folks on valuations. In fact, it’s probably been going on to some degree for eons. I hope they nail some folks on this one. This bullshit must stop.

  2. Anonymous

    We need Spitzer back.

    Surely we could excuse “pay for sex” so he could get after these bastards.

  3. Dave

    This man Cuomo is a modern-day Elliot Ness. He is truly duking it out with the gangsters of our modern times. Go son!

  4. Anonymous

    We used to catch traders booking ‘hedge’ deals with variable spreads to take advantage of subtle distortions they had entered in market data.

    When the market data was corrected (often something obscure like a 3D vol surface skew or SABR parameter) the P/L on their books would disappear like tax money in the hands of Hank Paulson.

    Ken Lewis should be fired for getting snookered by one of the oldest tricks in the books.

  5. sk

    This provides dramatic evidence for that research piece on the looting type of behavior that occurs in these circumstances – by Akerlof and Romer that you’ve highlighted in your blog a few times.


  6. Anonymous

    “I’ve read repeatedly of people who worked with traders saying that they would engage in strategies (not clearly described) that would lead them to show high profits though year end that they would wind up giving back (and often more) early in the next year. The idea was that they’d make so much on their trumped up performance that it didn’t matter if they were fired next year.”

    Frank Partnoy ex trader and now a law professor at the University of San Diego had these very tactics in his book FIASCO (1999). As a trader, he helped to put together “securities” that would book quick profits for Japanese fund managers but would blow up later on. All the managers cared about was the year end bonuses, knowing they would be moving on probably to other jobs in the next year.

    FIASCO illustrated many of the Wall Street abuses that led to this Crash and Burn. But we kill the Canaries rather than listen to them.

  7. Boat52

    We can only hope that Cuomo is cleaner than clean and that the dark force doesn’t try to unseat him before victory.

    Never before in history have so few taken so much from so many in such a short period of time.

  8. vlade

    This behaviour was/is common. In some companies, where you had a revenue ceiling (as it was recognised that too much of a revenue meant you were probably taking too much risks, so your bonus was capped at some revenue number), people used to shift PnL between quarters. So, if you made 50M, but your cap was 30M, you tried to shift 20M to the next quarter (so you’d have to make only 10M, and not loose the extra 20 you might have got by a lucky bet).

  9. Anonymous

    Why should traders be marking their own trades for the purpose of compensation in an enormous firm like this? Even at a much smaller firm that I used to work at, this never happened.

  10. Anonymous

    This is Cuomo as Claude Raines in Casablanca – shocked to find traders mismarking their positions. Such reliable features of human nature are the reason internal control procedures were established.
    The clear target here should be Ken Lewis – he struck a bad deal that failed to protect his shareholders at the time, as well as his future shareholders the American taxpayer.
    By all means fire the traders for being dirtbags, and strip them of their illegitimate bonuses. But however wrong individual positions may have been, the failure to focus on the relevant details of an M&A deal that was done on the fly over a weekend is the true criminal act here.

  11. chuck roast

    I’m keeping my eye on the Mayflower Hotel.
    If Cuomo checks in alone – he’s toast.

  12. Expat

    What! Traders manipulate marks at year end to increase their bonuses! I’m shocked, appalled, flabbergasted, etc.

    I also have twenty years of trading experience and can assure you that this is what happened. Most traders, trading managers, and senior managers must have known what was going on (sale to BOA but with early bonuses). The early bonuses were no doubt explained by saying it would be much more complicated to make the payments once the buy was completed (different payroll systems, tax implications, board approval, etc.). All good reasons to steal several billion bucks.

    Not only should every Merrill employee have to cough up his bonus, but Thain, all senior managers and the boards of both Merrill and BOA should be beaten to death with baseball bats (think cornfield scene in “Casino”). I’d settle for long prison terms in a NY State pen where the candy-ass bankers learn that raunchy trading floor talk has a different meaning with the Crips and the Bloods (“playing the spread”, “stuffing the customer”, “putting on a squeeze”, “fucking a competitor”, “jamming the market”, etc.)

  13. Anonymous

    Andrew Cuomo and Fannie and Freddie
    How the youngest Housing and Urban Development secretary in history gave birth to the mortgage crisis
    By Wayne Barrett
    published: August 05, 2008

    There are as many starting points for the mortgage meltdown as there are fears about how far it has yet to go, but one decisive point of departure is the final years of the Clinton administration, when a kid from Queens without any real banking or real-estate experience was the only man in Washington with the power to regulate the giants of home finance, the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC), better known as Fannie Mae and Freddie Mac.

    Andrew Cuomo, the youngest Housing and Urban Development secretary in history, made a series of decisions between 1997 and 2001 that gave birth to the country’s current crisis. He took actions that—in combination with many other factors—helped plunge Fannie and Freddie into the subprime markets without putting in place the means to monitor their increasingly risky investments. He turned the Federal Housing Administration mortgage program into a sweetheart lender with sky-high loan ceilings and no money down, and he legalized what a federal judge has branded “kickbacks” to brokers that have fueled the sale of overpriced and unsupportable loans. Three to four million families are now facing foreclosure, and Cuomo is one of the reasons why.

  14. Anonymous

    So Cuomo made it easier (but still illegal) for banks to cheat. They cheated, he is catching them and punishing them.

    OK sometime later we can investigate whether Cuomo should have done that. It’s beside the point, unless it suggests Cuomo is not being diligent and comprehensive in his attacks now.

    But for now, his prosecutions of banks and bankers should go forward. Maybe he is just engaged in some social engineering. If people don’t like that they should vote for Republicans. But what the bank and bankers did are crimes.

  15. Anonymous

    Yves, I was a junk bond trader for a large firm during the 1990’s. I was intimately involved in year-end book-marking chicanery to boost profits and hide bad positions.

    I can guarantee you that the traders at Merrill violated every securities rule in the books and every possible code of ethics in order to boost profits.


  16. Anonymous

    It’s called a calender “straddle”….says Johnny Dangereaux
    And yes it is “tunneling” in all it’s glory!

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