Courtesy of Pam Martens
Yesterday the Securities and Exchange Commission (SEC) quietly dropped a bomb on the relationship that the behemoth Wall Street firm Merrill Lynch has with its institutional clients. For those willing to skip past the timid press release from the SEC and dig carefully through the Administrative Proceeding Order, there was this startling revelation: Merrill Lynch had charged obscene markups (profits for the house) on bond trades over a three and a half-year period that were in two cases cited 23 times and 3 times the industry prescribed legal limit of less than 5 percent.
Merrill Lynch agreed to settle the charges by paying $10.5 million in disgorgement to its ripped-off customers and to pay penalties of $5.2 million to the SEC.
Merrill Lynch is best known as a firm with 15,000 brokers (financial advisors) in branch offices across the United States that caters to the retail market. But the charges brought by the SEC involved Merrill’s traders who were interacting with institutional investors. This raises the question that if Merrill was able to rip off sophisticated investors, what was it doing to its mom and pop clients?
The charges relate to conduct that occurred between June 2009 through December 2012. Let those dates sink in for a moment. It’s nine years since the start of this ripoff and the SEC is just now fining Merrill Lynch, raising the question as to whether the SEC lacks the will, or the staff, or the resources to do its job in a timely manner. It also gives Merrill the ability to tell customers that this all happened under trading supervisors who are long gone.
The bond trading at issue was in the “opaque” RMBS (residential mortgage backed securities) market. That was the subprime mortgage dreck that Wall Street created for the very purpose of making an opaque market in order to charge obscene fees at every stage of the pipeline. This had the upside of minting millionaires on Wall Street and the downside of collapsing the U.S. housing market, exploding the national debt via fiscal stimulus needed to resuscitate the U.S. economy and leaving taxpayers on the hook for the bailout of Wall Street. In addition to the billions of dollars that Merrill received from the publicly disclosed Troubled Asset Relief Program (TARP), Merrill was one of the top-three largest recipients of the secret loan program from the Federal Reserve, receiving $1.8 trillion cumulatively in almost zero-interest rate loans. The Fed battled in court for years to keep those payments secret.
In the current matter, the SEC cited the following two examples of outrageously obscene markups on bonds by Merrill:
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