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FINANCIAL CRISIS INQUIRY COMMISSION REPORT
calls, but AIG’s SEC filings to investors for mentioned the risk of collateral
calls only if AIG were downgraded.
Still, AIG never hedged more than million of its total subprime exposure.
Some of AIG’s counterparties not only used AIG’s swaps to hedge other positions but
also hedged AIG’s ability to make good on its contracts. As we will see later, Goldman
Sachs hedged aggressively by buying CDS protection on AIG and by shorting other
securities and indexes to counterbalance the risk that AIG would fail to pay up on its
swaps or that a collapsing subprime market would pull down the value of mortgage-
backed securities.
MERRILL: “WHATEVER IT TAKES”
When Dow Kim became co-president of Merrill Lynch’s Global Markets and Invest-
ment Banking Group in July , he was instructed to boost revenue, especially in
businesses in which Merrill lagged behind its competitors. Kim focused on the
CDO business; clients saw CDOs as an integral part of their trading strategy, CEO
Stanley O’Neal told the FCIC. Kim hired Chris Ricciardi from Credit Suisse, where
Ricciardi’s group had sold more CDOs than anyone else.
Ricciardi came through, lifting Merrill’s CDO business from fifteenth place in
to second place behind only Citigroup in and Goldman in . Then, in
February , he left the bank to become CEO of Cohen & Company, an asset man-
agement business; at Cohen he would manage several CDOs, often deals underwrit-
ten by Merrill.
After Ricciardi left, Kim instructed the rest of the team to do “whatever it takes”
not just to maintain market share but also to take over the number one ranking, for-
mer employees said in a complaint filed against Merrill Lynch. Kim told FCIC staff
that he couldn’t recall specific conversations but that after Ricciardi left, Merrill was
still trying to expand the CDO business globally and that he, Kim, wanted people to
know that Merrill was willing to commit its people, resources, and balance sheet to
achieve that goal.
It was indeed willing. Despite the loss of its rainmaker, Merrill swamped the com-
petition, originating a total . billion in mortgage-related CDOs in , while
the second-ranked firm, Morgan Stanley, did only . billion, and earning another
first-place ranking in , on the strength of the CDO machine Ricciardi had
built—a machine that brought in more than billion in fees between and
.
To keep its CDO business going, Merrill pursued three strategies, all of which in-
volved repackaging riskier mortgages more attractively or buying its own products
when no one else would. Like Citigroup, Merrill increasingly retained for its own
portfolio substantial portions of the CDOs it was creating, mainly the super-senior
tranches, and it increasingly repackaged the hard-to-sell BBB-rated and other low-
rated tranches of its CDOs into its other CDOs; it used the cash sitting in its synthetic
CDOs to purchase other CDO tranches.
