Courtesy of Pam Martens
Michael Lewis
What the Financial Crisis Inquiry Commission (FCIC) wanted to see the U.S. Justice Department pursue was a potential criminal prosecution of Stan O’Neal, the CEO of Merrill Lynch in the leadup to the financial crisis, and its then CFO Jeffrey Edwards, for “making materially false and misleading representations and omissions about (a) Merrill’s exposure to retained CDO positions, (b) the value of those positions and (c) the firm’s risk management.” The FCIC also believed that Merrill had lied “in the offering documents for its $1.5 billion Norma CDO that was sold to investors in March of 2007.”
A CDO is a Collateralized Debt Obligation which can be stuffed with about anything but during the 2006-2007 period was typically stuffed with subprime mortgages or synthetics linked to subprime mortgages. It was Wall Street’s cash cow and through what amounted to pay-to-play relationships with the credit ratings agencies, these CDOs received AAA-ratings that were eventually downgraded to junk and traded at pennies on the dollar.
The FCIC voted in favor of making a criminal referral of these Merrill matters in October of 2010 and relayed a detailed Memorandum to the Justice Department. (Read the full Memorandum here.) The FCIC relayed its final report to Congress and the public on January 27, 2011. Unfortunately, the public knew nothing about this criminal referral of Merrill Lynch execs and other Wall Street executives until March of 2016 when the National Archives and Records Administration released thousands of sealed documents from the FCIC’s work.
Much has been written about Goldman Sach’s dirty dealings in its Abacus deal, where it had allowed hedge fund Paulson & Co. to select subprime instruments likely to fail, knew it was shorting the deal, while selling the investment as a good deal to other investors. The SEC estimated that investors lost more than $1 billion in the deal while Paulson made $1 billion. Goldman paid $550 million to settle civil charges; Paulson didn’t even get fined; and a lowly Goldman salesman named Fabrice Tourre took the fall for the whole firm. Tourre was found guilty in a civil trial and fined $825,000.
The FCIC stated in its referral to the U.S. Justice Department that it found what Merrill was doing very similar to the Abacus deal. The FCIC wrote:
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